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. depreciation) $235,000 Tax rate 35.0% $36,778 S31,770 $30,258 535,027 $33,359

Explanation / Answer

Net income=(sales-op cost-dep)*(1-tax rate)
cash flow=net income+Dep
dep=33%*65000=21,450
Net income=
=(60,000-25000-21450)*(1-.35)
=8807.5

Cash flow=8807.5+21450=$30,257.5

Option D

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