Asked by ?ông Ngô Trinh on Jul 29, 2024
Verified
If pre-tax cash flow is $100,000 and the tax rate is 20%, after-tax cash flow is:
A) $100,000.
B) $60,000.
C) $120,000.
D) $80,000.
Pre-tax Cash Flow
The amount of cash that a company generates before accounting for taxes, used in assessing financial performance.
After-tax Cash Flow
The net cash flow from business operations or investments after accounting for taxes.
Tax Rate
The rate at which taxes are levied on an individual or a company.
- Grasp the introductory elements of capital budgeting and the various tactics employed in the valuation of investment projects.
- Understand the effect of tax implications on cash flows from capital investments.
Verified Answer
SS
sasheka sewellJul 30, 2024
Final Answer :
D
Explanation :
First, we need to calculate the after-tax cash flow for each year of the project:
Year 0: -$120,000 - $30,000 = -$150,000 (initial investment and working capital)
Year 1-10: $100,000 - ($100,000 x 0.20) = $80,000 (pre-tax cash flow minus taxes)
Year 10: $80,000 + $10,000 = $90,000 (last year's after-tax cash flow plus salvage value)
Next, we calculate the present value of each after-tax cash flow using the discount rate:
PV(Y0) = -$150,000 / (1 + 0.16)^0 = -$150,000
PV(Y1-10) = $80,000 / (1 + 0.16)^1 + $80,000 / (1 + 0.16)^2 + ... + $80,000 / (1 + 0.16)^10 = $425,541
PV(Y10) = $90,000 / (1 + 0.16)^10 = $20,772
Finally, we add up all the present values to get the net present value (NPV):
NPV = -$150,000 + $425,541 + $20,772 = $296,313
Since the NPV is positive, this project is acceptable and financially feasible. Therefore, the best choice is option D.
Year 0: -$120,000 - $30,000 = -$150,000 (initial investment and working capital)
Year 1-10: $100,000 - ($100,000 x 0.20) = $80,000 (pre-tax cash flow minus taxes)
Year 10: $80,000 + $10,000 = $90,000 (last year's after-tax cash flow plus salvage value)
Next, we calculate the present value of each after-tax cash flow using the discount rate:
PV(Y0) = -$150,000 / (1 + 0.16)^0 = -$150,000
PV(Y1-10) = $80,000 / (1 + 0.16)^1 + $80,000 / (1 + 0.16)^2 + ... + $80,000 / (1 + 0.16)^10 = $425,541
PV(Y10) = $90,000 / (1 + 0.16)^10 = $20,772
Finally, we add up all the present values to get the net present value (NPV):
NPV = -$150,000 + $425,541 + $20,772 = $296,313
Since the NPV is positive, this project is acceptable and financially feasible. Therefore, the best choice is option D.
Learning Objectives
- Grasp the introductory elements of capital budgeting and the various tactics employed in the valuation of investment projects.
- Understand the effect of tax implications on cash flows from capital investments.
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