Question

B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $288,000 and has a 12-year life and no salvage value. The expected annual income for each year from this equipment follows.

Sales of new product $ 180,000
Expenses Materials, labor, and overhead (except depreciation) 96,000
Depreciation-Equipment 24,000
Selling, general, and administrative expenses Income 18,000 Income $ 42,000

(a) Compute the annual net cash flow

Answer 1

Based on the given information, the annual net cash flow for each year is $42,000.

How to compute the annual net cash flow

To compute the annual net cash flow, calculate the total cash inflows and deduct the total cash outflows for each year.

The annual net cash flow can be calculated as follows:

Net Cash Flow = Total Cash Inflows - Total Cash Outflows

Given the information, we can calculate the annual net cash flow for each year as follows:

Year 1:

Total Cash Inflows = Sales of new product = $180,000

Total Cash Outflows = Expenses (materials, labor, and overhead) + Depreciation - Equipment + Selling, general, and administrative expenses = $96,000 + $24,000 + $18,000 = $138,000

Net Cash Flow = $180,000 - $138,000 = $42,000

Years 2 to 12:

Total Cash Inflows = Sales of new product = $180,000

Total Cash Outflows = Expenses (materials, labor, and overhead) + Depreciation - Equipment + Selling, general, and administrative expenses = $96,000 + $24,000 + $18,000 = $138,000

Net Cash Flow = $180,000 - $138,000 = $42,000

Therefore, the annual net cash flow for each year is $42,000.