Fitzgerald Computers is considering a new project whose data are shown below.The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years.Revenues and other operating costs are expected to be constant over the project's 3-year life.What is the project's Year 1 cash flow?
$\begin{array}{lr}
\text { Equipment cost (depreciable basis) } & \$ 65,000 \
\text { Straight-line depreciation rate } & 33.333 \% \
\text { Sales revenues, each year } & \$ 60,000 \
\text { Operating costs (excl. deprec) } & \$ 25,000 \
\text { Tax rate } & 25.0 \%
\end{array}$
A) $29,351
B) $30,103
C) $30,875
D) $31,667
E) $32,458

Question

Fitzgerald Computers is considering a new project whose data are shown below.The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years.Revenues and other operating costs are expected to be constant over the project's 3-year life.What is the project's Year 1 cash flow? 
$\begin{array}{lr}
\text { Equipment cost (depreciable basis) } & \$ 65,000 \
\text { Straight-line depreciation rate } & 33.333 \% \
\text { Sales revenues, each year } & \$ 60,000 \
\text { Operating costs (excl. deprec) } & \$ 25,000 \
\text { Tax rate } & 25.0 \%
\end{array}$
A) $29,351
B) $30,103
C) $30,875
D) $31,667
E) $32,458

Quizplus · Accepted Answer

To calculate the project's Year 1 cash flow, follow these steps:1. Calculate depreciation:    - Depreciation = Equipment cost * Straight-line depreciation rate   - Depreciation = $65,000 * 33.333% = $21,666.672. Calculate operating income before taxes:   - Operating income before taxes = Sales revenues - Operating costs - Depreciation   - Operating income before taxes = $60,000 - $25,000 - $21,666.67 = $13,333.333. Calculate taxes:   - Taxes = Operating income before taxes * Tax rate   - Taxes = $13,333.33 * 25% = $3,333.334. Calculate net income:   - Net income = Operating income before taxes - Taxes   - Net income = $13,333.33 - $3,333.33 = $10,0005. Calculate cash flow:   - Cash flow = Net income + Depreciation   - Cash flow = $10,000 + $21,666.67 = $31,666.67Therefore, the project's Year 1 cash flow is approximately $31,667, which corresponds to choice D.

Fitzgerald Computers Is Considering a New Project Whose Data Are