Answer:
B) $27,175
Step-by-step explanation:
future cash flows = [(total sales revenue - other operating costs - depreciation expense) x (1 - tax rate)] + depreciation expense =
= [($62,500 - $25,000 - $8,000) x (1 - 35%)] + $8,000 = $19,175 + $8,000 = $27,175
When you calculate net cash flows, you must first include depreciation expense to determine EBIT. Interest expenses are no included in this calculation, but you must then decrease taxes due. After you have calculated taxes, you must add depreciation expense. Interest expenses are not included because the net cash flow calculates cash flows generated by a project and it doesn't matter where the money came from. Depreciation expenses must be added at the end because they do not represent any cash outflow.