Wonton Productions bought a piece of equipment for $55,898 that will last for 5 years. The equipment will generate net operating cash flows of $14,000 per year and will have no salvage value at the end of its life. Straight-line depreciation is used. The income tax rate is 30%. How much is net income or (loss) in year 2?

Question

Quizplus · Accepted Answer

The net income is calculated by subtracting depreciation and taxes from the net operating cash flows. Depreciation is $55,898 / 5 = $11,179. The taxable income is $14,000 - $11,179 = $2,821. After taxes (30%), the net income is $2,821 * (1 - 0.30) = $1,974.70, which rounds to $2,820.

Wonton Productions Bought a Piece of Equipment for $55,898 That