Fool Proof Software is considering a new project whose data are shown below. The

Question

Fool Proof 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%, 45%, 15%, and 7% 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? Equipment cost (depreciable basis) $65,000 Sales revenues, each year $60,000 Operating costs (excl. deprec.) $25,000 Tax rate 35.0% Answer $30,258 $31,770 $33,359 $35,027 $36,778

Explanation / Answer

Correct Answer is (a) Equipment cost $65,000 Depreciation rate 33.0% Sales revenues $60,000 - Operating costs (excl. deprec.) 25,000 - Depreciation 21,450 Operating income (EBIT) $13,550 - Taxes Rate = 35% 4,743 After-tax EBIT $ 8,808 + Depreciation 21,450 Cash flow, Year 1 $30,258

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