Question

Your firm runs a factory that currently produces only jump ropes. You forecast that you will generate $200,000 in after-tax operating cash flows from jump ropes next year. You are considering expanding to produce pogo sticks as well. If you produce pogo sticks then your projected after-tax operating cash flows from jump ropes will be $160,000 and you will have $50,000 in after-tax operating cash flows from pogo sticks.
What are the incremental cash flows that you should consider for this project?

Answer 1

Answer:

Incremental cash-flow  $10,000

Explanation:

The incremental cash flow would be the difference between the cash flow before the expansion and after the expansion.

                                                                                                              $

After tax cash flow from Jump before the decision                     200,000

After tax cash flow from Jump after the decision                          160,000

loss in cash flow                                                                               ( 40,000)

add After tax cash flow from Pogo                                                   50,000          

Incremental cash-flow                                                                      10,000