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10 January, 03:19

Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?

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  1. 10 January, 04:49
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    The cash flow for year 1 = $ 30,333

    Explanation:

    To calculate year one depreciation,

    Depreciation expense = cost of the asset * rate of first year depreciation

    = 65000*33.33/100

    = $21,664.50

    To calculate the tax saving on depreciation,

    Tax saving on depreciation = depreciation expense*tax rate

    = 21,664.50*35/100

    = $ 7,582.575

    Sales revenue = $ 60,000

    Less: operating expense = $25,000

    Profit before tax = $35,000

    Less: tax expense at 35% on $35,000 = $ 12,250

    Profit after tax = $22,750

    Add: tax saving on depreciation = $ 7,582.575

    Cash flow for year 1 = $22,750+$ 7,582.575

    = 30,332.575 or 30,333

    The cash flow for year 1 = $ 30,333
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