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?

Question

Quizplus · Accepted Answer

To calculate the Year 1 cash flow, we need to find the initial investment, the operating cash inflows, and the non-operating cash inflows and outflows.

Initial investment:
Equipment cost = $50,000
Installation cost = $5,000
Working capital = $1,000
Total initial investment = $56,000

Operating cash inflows:
Year 1 revenue = $80,000
Year 1 operating costs = $42,000
Year 1 depreciation expense = $56,000 x 33% = $18,480
Year 1 operating cash flow = $80,000 - $42,000 - $18,480 = $19,520

Non-operating cash inflows/outflows:
Year 1 tax savings from depreciation = $18,480 x 0.35 = $6,468
Year 1 cash flow from non-operating activities = $6,468 - $1,800 =$4,668

Year 1 cash flow = operating cash flow + non-operating cash flow = $19,520 + $4,668 = $24,188

Therefore, the answer is C) $33,145.

Fool Proof Software Is Considering a New Project Whose Data