Warren Company plans to open a new repair service center
Warren Company plans to open a new repair service center for one of its electronic products. The center requires an investment in depreciable assets costing $480,000. The assets will be depreciated on a straight-line basis, over four years, and have no expected salvage value. The annual income statement for the center is given below.
Revenues.............. $ 360,000
Less: Cash operating expenses ..... (150,000)
Depreciation ........... (120,000)
Income before income taxes ..... $ 90,000
Less: Income taxes (@ 40%) ..... 36,000
Net income ........... $ 54,000
Required:
1. Using the income approach, calculate the after-tax cash flows.
2. Using the decomposition approach, calculate the after-tax cash flows for each item of the income statement and show that the total is the same as the income approach.
3. What if it is desirable to express the decomposition approach in a spreadsheet format for the four years to facilitate the use of spreadsheet software packages? Express the decomposition approach in a spreadsheet format, with a column for each income item and a total column.
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