2D1C REGIS COMPANY, WHICH IS SUBJECT TO AN EFFECTIVE INCOME TAX RATE...

306.

CSO: 2D1c

LOS: 2D1c

Regis Company, which is subject to an effective income tax rate of 30%, is evaluating a

proposed capital project. Relevant information for the proposed project is summarized

below.

Initial investment

$500,000

Annual operating cash inflows

for the first three years.

Year 1

185,000

Year 2

175,000

Year 3

152,000

Depreciation will be calculated under the straight-line method using an 8-year estimated

service life and a terminal value of $50,000. In determining the estimated total after-tax

cash flow in Year 2 of the project, Regis should consider the after-tax operating cash

a.

inflow only.

b.

inflow plus annual depreciation expense.

c.

inflow plus annual depreciation tax shield.

d.

inflow plus the net impact of the annual depreciation expense and depreciation tax

shield.