Taylor Inc., the company you work for, is considering a new project whose data are shown below.What is the project's Year 1 cash flow? $$\begin{array} { l r }
\text { Sales revenues, each year } & \$ 62,500 \
\text { Depreciation } & \$ 8,000 \
\text { Other operating costs } & \$ 25,000 \
\text { Interest expense } & \$ 8,000 \
\text { Tax rate } & 25.0 \%
\end{array}$$
A) $28,619
B) $30,125
C) $31,631
D) $33,213
E) $34,873

Question

Taylor Inc., the company you work for, is considering a new project whose data are shown below.What is the project's Year 1 cash flow? $$\begin{array} { l r } 
\text { Sales revenues, each year } & \$ 62,500 \
\text { Depreciation } & \$ 8,000 \
\text { Other operating costs } & \$ 25,000 \
\text { Interest expense } & \$ 8,000 \
\text { Tax rate } & 25.0 \%
\end{array}$$
A) $28,619
B) $30,125
C) $31,631
D) $33,213
E) $34,873

Quizplus · Accepted Answer

To calculate the Year 1 cash flow, we first find the operating income before taxes by subtracting operating costs and depreciation from sales revenues: $62,500 - $25,000 - $8,000 = $29,500. Interest expense is not deducted here because it's a financing cost, not an operating cost. The tax is then calculated on this amount: $29,500 * 25% = $7,375. The after-tax operating income is $29,500 - $7,375 = $22,125. Finally, we add back the depreciation (a non-cash charge) to get the cash flow: $22,125 + $8,000 = $30,125.

Taylor Inc A) $28,619 B) $30,125 C) $31,631 D) $33,213 E) $34,873

Taylor Inc A) $28,619
B) $30,125
C) $31,631
D) $33,213
E) $34,873