Question

You are trying to decide whether to accept or reject a one-year project. The project is estimated to generate $5,000 in incremental gross profit, which includes $200 in depreciation. Incremental SG&A expense is $400. At a 35% tax rate, the after-tax incremental cash flow is:

Answer 1

The equation for incremental cash flow is

Incremental cash flow = revenues - expenses - less tax +depreciation

Incremental gross profit ………………..….........$5000  

Less:Incremental SG&A Expense……......…($400)  

Incremental Net Profit…………………......….....$4600

Less: Tax 35%……………......…………...........……($1610)

Incremental Net Profit after tax…......………$2990

Add:Depreciation…………………..............…..……$200

Net incremental cash flow after tax…....….$3190

Note that depreciation is added after deducting tax from the incremental net profit.