The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's tax rate is 34%, what is the cash flow from the project in year 1?

Question

Quizplus · Accepted Answer

The cash flow in year 1 is calculated by considering the tax savings from depreciation and the reduction in expenses. Depreciation for year 1 is $55,000 * 33% = $18,150. Tax savings from depreciation is $18,150 * 34% = $6,171. The reduction in expenses is $25,000, which saves $25,000 * 34% = $8,500 in taxes. Total cash flow = $25,000 (expense reduction) + $6,171 (tax savings from depreciation) = $31,171. After tax savings from expense reduction, the net cash flow is $31,171 - $8,500 = $22,671.