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My professor showed us two ways to calculate Annual cash flow. Why do I add the depreciation to the net income to get annual cash
My professor showed us two ways to calculate Annual cash flow. Why do I add the depreciation to the net income to get annual cash flow? If I am given a problem during an exam, how do I go about calculating annual cash flow? SHORT PROBLEM A company is considering whether to purchase a new machine that would cost $50,000, have a four-year life and no salvage value. It would be depreciated with the straight-line method. Revenues are assumed to occur near the end of each year. The company would expect to generate annual income in each of the next four years as shown below: $210,000 Sales Costs: Materials, labor, and overhead other than depreciation Depreciation on the new machine Selling and administrative expenses $115,000 12,500 65,000 Income before income taxes Income taxes Net Income 192,500 $17,500 7,000 $10,500 I. This machine is expected to produce an annual net cash flow of Sales Operating costs Selling and admin. Expenses Income taxes Annual cash flow $210,000 (115,000) (65,000) (7,000) $23,000
My professor showed us two ways to calculate Annual cash flow. Why do I add the depreciation to the net income to get annual cash flow?
If I am given a problem during an exam, how do I go about calculating annual cash flow?
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