Diane Manufacturing Company is considering investing $600,000 in new equipment with an estimated useful life of 10 years and no salvage value. The equipment is expected to produce $240,000 in cash inflows and $160,000 in cash outflows annually. The company uses straight-line depreciation, and has a 40% tax rate. Determine the annual estimated net income and net cash inflow.

Annual estimated net income is $360,00.

Annual estimated net cash inflow is $216,000.

Explanation:

1. Determine the annual estimated net income

Annual estimated net income = Annual cash inflows - Annual cash outflow

Annual estimated net income = $600,000 - $240,000 = $360,00

2. Determine the annual estimated net cash inflow

Annual Tax = Annual estimated net income × Tax rate

Annual Tax = $360,00 × 40% = $144,000.  

Annual estimated net cash inflow = Annual estimated net income - Annual Tax

Annual estimated net cash inflow = $360,00 - $144,000 = $216,000.

Note that depreciation is not considered in the calculation because depreciation not a cash expense.

The annual estimated net income is $ 12,000.

The net cash inflow is$ 72,000

Explanation:

To calculate the annual estimated net income you have to perform the following:

Expected Cash Inflows                               240,000

Less: Expected Cash Outflows                   160,000

Annual Net Cash Inflow                               80,000

Less: Depreciation [(600,000 – 0)/10]        60,000

Estimated Income before tax                       20,000

Less: Tax @ 40%                                            8,000(20,000*40%)

Net Income (Income after tax)                     $ 12,000

Next, having calculated the net income you can go on with the net cash inflow:

Net Income after tax                                         12,000

Add: Depreciation (non-cash item)                 60,000

Annual Net Cash Inflows                                $72,000

The Depreciation is deducted to avail the tax benefit from the income since depreciation is an allowable expenses. it is deducted from income when calculating the Net Income after tax.

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