3.2 The following events are assumed to take place at time 1. Determine the cash flow for investment evaluation purposes. The tax rate is 0.35.

Credit sales $40,000

Cash sales 100,000

Out-of-pocket expenses 75,000

Income taxes 9,800 (reflects the $7,000 interest expense tax shield and the $30,000 depreciation)

Depreciation (accounting) 20,000

Depreciation (tax) 30,000

Change in net working capital (increase) 8,000 (includes $28,000 of accounts receivable that only costs $20,000 incrementally)

Interest expense 7,000

Principal payment 16,000