The owner of a pizza restaurant needs to buy a new pizza oven for the restaurant. The oven costs $500, is expected to last 10 years, and will be depreciated using the straight line method. If the total cash inflows from the new oven are constant at $850 for the next 5 years, and the total cash outflows are constant at $240 for the next 5 years, determine the cash flow for the pizza restaurant in the second year assuming the tax rate is 34%. X $ 430 419.60 Place your answer in dollars and cents. Feedback: The estimation of cash flow is found by subtracting outflows (Po in the formula) from project inflows (Pi in the formula) per year. Those values are given in the question above. Depreciation is a non-cash expense that impacts the amount of taxes the firm owes and is therefore relevant in cash flow. And so we subtract depreciation out before determining the tax bill, and then we add this amount back as it never really left the firm. This is why depreciation is included twice in formula 8.2. formula for cash flow is give by: Cash Flow=(Cash Inflow-Cash Outflow-Depreciation)*(1-Tax Rate)+Depreciation All the values are given in the formula above. Here we can see that depreciation matters only in the sense that it reduces the tax bill. In other words, if you take depreciation out of the equation, the taxes owed will be higher. Adding it back in after taxes have been determined results in the "tax shield" aspect of depreciation in cash flows