Question

To open a new store, Jordan Tire Company plans to invest $392,000 in equipment expected to have a seven -year useful life and no salvage value. Jordan expects the new store to generate annual cash revenues of $316,000 and to incur annual cash operating expenses of $189,000. Jordan’s average income tax rate is 35 percent. The company uses straight-line depreciation.

Required

Determine the expected annual net cash flows from operations for each of the first four years after Jordan opens the new store. (Negative amounts should be indicated by a minus sign.)

Answer 1

Annual Depreciation Under Straight line method
	=392,000/7 =56000
	Year 1	Year 2	Year 3	Year 4
Annual Cash Revenues	3,16,000	3,16,000	3,16,000	3,16,000
Less:
Annual Cash Operating Expenses	-1,89,000	-1,89,000	-1,89,000	-1,89,000
Annual Depreciation	-56,000	-56,000	-56,000	-56,000
Total Expenses	-2,45,000	-2,45,000	-2,45,000	-2,45,000
Net operating Income	71,000	71,000	71,000	71,000
Income Taxes @ 35%	24,850	24,850	24,850	24,850
Add back : Depreciation	56,000	56,000	56,000	56,000
Expected Annual net cash flows from Operations	80,850	80,850	80,850	80,850