Your new employer, Freeman 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 33.33%, 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 life.What is the Year 1 cash flow? $\begin{array}{lr}
\text { Equipment cost (depreciable basis) } & \$ 65,000 \
\text { Sales revenues, each year } & \$ 60,000 \
\text { Operating costs (excl. deprec) } & \$ 25,000 \
\text { Tax rate } & 25.0 \%
\end{array}$
A) $31,666
B) $31,849
C) $33,442
D) $35,114
E) $36,869

Question

Quizplus · Accepted Answer

The Year 1 cash flow is calculated as follows:Sales revenues: $60,000Operating costs: $25,000Depreciation: $65,000 * 33.33% = $21,665Taxable income: $60,000 - $25,000 - $21,665 = $13,335Taxes: $13,335 * 25% = $3,334Net income: $13,335 - $3,334 = $10,001Cash flow: $10,001 + $21,665 = $31,666

Your New Employer, Freeman Software, Is Considering a New Project