After-Tax Operating Cash Flows

In addition to determining the initial out-of-pocket outlay, managers must also estimate the annual after-tax operating cash flows expected over the life of the project. If the project generates revenue, the principal source of cash flows is from operations. Operating cash inflows can be assessed from the projects income statement. The annual after-tax cash flows are the sum of the projects after-tax profits and its noncash expenses. In terms of a simple formula, this computation can be represented as follows:

After-tax cash flow = After-tax net income + Noncash expenses

The income approach to determine operating cash flows can be decomposed to assess the after-tax, cash flow effects of each individual item on the income statement. The decomposition approach calculates the operating cash flows by computing the after-tax cash flows for each item of the income statement as follows:

CF = [(1 Tax rate) Revenues)] [(1- Tax rate) Cash expenses] + (Tax rate Noncash expenses)

Apply the Concepts

A company plans to make a new product that requires new equipment costing $1,600,000. Both the product and equipment have a life of four years. The equipment will be depreciated on a straight-line basis, with no expected salvage value. The annual income statement for the product is given below.

Revenues	$1,800,000
Less: Cash operating expenses	(750,000)
Depreciation	(600,000)
Income before income taxes	$450,000
Less: Income taxes (@ 40%)	180,000
Net income	$270,000

Required:

Calculate the annual operating after-tax cash flow by completing the following table. Enter amounts that represent cash outflows as negative numbers.

Year	(1 t)Ra		(1 t)Cb		tNCc		CF
1	$		$		$		$
2			$
3			$
4			$

^aR = Revenue. ^bC = Cash operating expenses. ^cNC = Noncash operating expenses.