Determining the cash flow annuity with income tax considerations To open a new store, Alpha Tire Company

Question:

Determining the cash flow annuity with income tax considerations To open a new store, Alpha Tire Company plans to invest $240,000 in equipment expected to have a four-year useful life and no salvage value. Alpha expects the new store to generate annual cash revenues of $315,000 and to incur annual cash operating expenses of $195,000. Alpha’s average income tax rate is 30 percent. The company uses straight-line depreciation.

Required

Determine the expected annual net cash inflow from operations for each of the first four years after Alpha opens the new store.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...