Question

You are evaluating a potential investment in equipment. The equipment's basic price is $176,000, and shipping costs will be $3,500. It will cost another $17,600 to modify it for special use by your firm, and an additional $8,800 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 30,900 at the end of three years. The equipment is expected to generate revenues of $151,000 per year with annual operating costs of $77,000. The firm's marginal tax rate is 35.0%. What is the after-tax operating cash flow for year 1

Answer 1

Answer:

$71,881.45

Explanation:

The after-tax operating cash flow for year 1 is simply the net income plus depreciation for year 1 since depreciation needs to be added back to net income as it is not a cash outflow in the actual sense.

net income=(revenue-annual operating costs-depreciation)*(1-tax rate)

revenue=$151,000

annual operating costs=$77,000

depreciation expense for year 1=($176,000+$3,500+$17,600+$8,800)*33%

depreciation expense for year 1=$67,947.00

tax rate=35.0%

net income=($151,000-$77,000-$67,947)*(1-35%)

net income=$3,934.45  

after-tax operating cash flow for year 1=$3,934.45+$67,947.00

after-tax operating cash flow for year 1= $71,881.45