Question

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?

Answer 1

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