Question

To open a new store, Linton Tire Company plans to invest $212,000 in equipment expected to have a four -year useful life and no salvage value. Linton expects the new store to generate annual cash revenues of $316,000 and to incur annual cash operating expenses of $195,000. Linton’s average income tax rate is 35 percent. The company uses straight-line depreciation.

Required

Determine the expected annual net cash inflow / outflow from operations for each of the first four years after Linton opens the new store. (Negative amounts should be indicated by a minus sign.) Year Net Cash Inflow/Outflow 1 ??? ????? 2 ???? ?????? 3 ???? ????? 4 ????? ??????

Answer 1

Cash flow from operating activities (CFO) is an accounting item that indicates the amount of money a company brings in from the ongoing regular business activities, such as manufacturing and selling goods or providing a service. Cash flow from operating activities does not include long-term capital expenditures or investment costs, as they may be one time activities. CFO focuses only on the core business, and is also known as operating cash flow (OCF) or net cash from operating activities.

FORMULA:

CashFlow from Operating Activities = Net Income + Depreciation + Adjustments To Net Income + Changes In Accounts Receivables + Changes In Liabilities + Changes In Inventories + Changes In Other Operating Activities

Net income =316000-195000-53000-35%

=68000-35% of 68000

= 68000-23800

= $ 44200

Depreciation =212000/4

= 53000

Net cash flow from operations for year 1 = $ 97200

Net cash flow from operations for year 2 = $97200

Net cash flow from operations for year 3 = $97200

Net cash flow from operations for year 4 = $97200