Asked by Bella Carranza on May 05, 2024
Verified
A capital budgeting project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000 and the firm's tax rate is 40 percent. Determine the project's annual net cash flows.
A) $48,000
B) $66,000
C) $36,000
D) None of the above
Earnings Before Taxes
An indicator of a company's financial performance calculated as revenue minus expenses, excluding taxes.
Annual Depreciation
The annual allocation of the cost of an asset over its useful life, reflecting the consumption or the decline in the value of the asset over that period.
- Calculate the post-tax cash flows for capital investments.
Verified Answer
NK
NITIN KUMARMay 09, 2024
Final Answer :
B
Explanation :
The project's annual net cash flows can be calculated by adding back the depreciation to the after-tax earnings. First, calculate the after-tax earnings: EBT - Taxes = $60,000 - ($60,000 * 40%) = $60,000 - $24,000 = $36,000. Then, add back the depreciation: $36,000 + $30,000 = $66,000.
Learning Objectives
- Calculate the post-tax cash flows for capital investments.
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