Question

The Blue Lagoon is considering a project with a five-year life. The project requires $32,000 of fixed assets that are classified as five-year property for MACRS. Variable costs equal 67 percent of sales, fixed costs are $12,600, and the tax rate is 34 percent. What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages?
Year 1 2 3 4 5
Sales $ 32,000 $ 34,500 $ 35,600 $ 38,900 $ 42,000
MACRS rate 20.00 32.00 19.20 11.52 11.52
Multiple Choice
−$1,806.67
$640.89
$1,311.16
$1,409.80
−$2,276.60

Answer 1

Answer:

$1,409.80

Explanation:

Time line                                                            0                1      

Cost of new machine                               -32000    

= Initial Investment outlay                       -32000    

5 years MACR rate                         20.00%     32.00% 19.20% 11.52%

Sales                                                 32000      34500 35600 38900

Profits Sales-variable cost                       10560      11385 11748 12837

Fixed cost                                        -12600     -12600 -12600 -12600

- Depreciation = Cost of machine*MACR%      -6400             -10240 -6144 -3686.4

=Pretax cash flows                                 -8440      -11455 -6996 -3449.4

-taxes = (Pretax cash flows)*(1 - tax)               -5570.4      -7560.3 -4617.36 -2276.604

+ Depreciation                                    6400        10240 6144 3686.4

= after tax operating cash flow           829.60        2679.70 1526.64 1409.796

                                                   2                       3                        4

5 years MACR rate          32.00%           19.20%             11.52%

Sales                    34500            35600             38900

Profits  Sales-variable cost     11385             11748             12837

Fixed cost             -12600            -12600            -12600

- Depreciation = Cost of machine*MACR% -10240   -6144   -3686.4

=Pretax cash flows      -11455             -6996             -3449.4

-taxes = (Pretax cash flows)*(1 - tax) -7560.3    -4617.36    -2276.604

+ Depreciation        10240               6144              3686.4

= after tax operating cash flow   2679.70      1526.64      1409.796

Therefore, The operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages is $1409.796