Claremore Candy Company (CCC) just bought a machine that is expected to generate
ID: 2766977 • Letter: C
Question
Claremore Candy Company (CCC) just bought a machine that is expected to generate $31001 in operating income before depreciation expenses each year. The machine, which has a depreciable basis of $83990, falls into the MACRS 3-year class.
What will be CCC's:
(a) After-tax operating income three years from now (year 3)?
(b) Operating cash flow this year (year 1)?
Assume that all sales and operating expenses, except depreciation, are cash. CCC's marginal tax rate is 26 percent.
Explanation / Answer
Year
Depreciation Expense
1
$37,329
2
$31,107
3
$11,665
4
$3,888
After-tax operating income in Year:
Operating Income
$31,001.00
Depreciation
$11,665.00
EBT
$19,336.00
Tax @26%
$5,027.36
After tax operating Income
$14,308.64
Operating Cash flow in Year 1:
Operating Income
$31,001.00
Depreciation
$37,329.00
EBT
-$6,328.00
Tax @26%
-$1,645.28
After tax operating Income
-$4,682.72
Add: Depreciation
$37,329.00
After-tax operating cash flow
$32,646.28
Year
Depreciation Expense
1
$37,329
2
$31,107
3
$11,665
4
$3,888