Question

Canine Industries anticipates investment in equipment designed to improve the efficiency of its operations. The company anticipates that the investment will generate $10,000 in revenue in addition to producing annual cost savings of $40,000. If the tax rate applicable to the company is 25%, what are the anticipated after-tax cash flows of the investment

Answer 1

The amount of after-tax cash flows for Company C on its investment is $37,500.

What is an after-tax income?

After-tax income is the gains earned by the company in an accounting year that remain after adjusting its income taxes.

Given values:

Revenues: $10,000

Savings: $40,000

Total investment income: $50,000 ($10,000 + $40,000)

Rate of tax: 25%

Computation of after-tax cash flows of an investment project:

$\rm\ After-tax \rm\ cash \rm\ flows=\rm\ Total \rm\ investment \rm\ income - (\rm\ Total \rm\ investment \rm\ income \times\ 25\%)\\\rm\ After-tax \rm\ cash \rm\ flows= \ 50,000- (\ 50,000 \times\ 25\%)\\\rm\ After-tax \rm\ cash \rm\ flows=\ 37,500$

Therefore, $37,500  is the value of after-tax ash flows being earned from the investment in equipment.

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