Whitestone Products is considering a new project whose data are shown below.The required equipment has a 3-year tax life, and the accelerated rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life.What is the project's Year 4 cash flow?
$\begin{array}{lr}
\text { Equipment cost (depreciable basis) } & \$ 70,000 \
\text { Sales revenues, each year } & \$ 42,500 \
\text { Operating costs (excl. deprec.) } & \$ 25,000 \
\text { Tax rate } & 25.0 \%
\end{array}$
A) $13,016
B) $13,701
C) $14,422
D) $15,143
E) $15,900

Question

Whitestone Products is considering a new project whose data are shown below.The required equipment has a 3-year tax life, and the accelerated rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life.What is the project's Year 4 cash flow?
 $\begin{array}{lr}
\text { Equipment cost (depreciable basis) } & \$ 70,000 \
\text { Sales revenues, each year } & \$ 42,500 \
\text { Operating costs (excl. deprec.) } & \$ 25,000 \
\text { Tax rate } & 25.0 \%
\end{array}$
A) $13,016
B) $13,701
C) $14,422
D) $15,143
E) $15,900

Quizplus · Accepted Answer

In Year 4, depreciation is $70,000 * 7.41% = $5,187. The taxable income is $42,500 - $25,000 - $5,187 = $12,313. Taxes are $12,313 * 25% = $3,078.25. The net income is $12,313 - $3,078.25 = $9,234.75. Adding back depreciation, the cash flow is $9,234.75 + $5,187 = $14,421.75, rounded to $14,422.

Whitestone Products Is Considering a New Project Whose Data Are