LISP Inc. is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first-year depreciation rate = 33.33%). The new mixer should increase revenues by $20,000 per year, with no increase in operating cost. If LISP's marginal tax rate is 40 percent, what is the net cash flow in the first year?
A) $22,665
B) $19,000
C) $18,666
D) $21,500

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation expense for the first year: 
Year 1: $50,000 x 33.33% = $16,665

Next, we need to calculate the taxable income: 
Revenue increase: $20,000
Depreciation expense: $16,665 
Taxable income: $3,335

The tax liability can be calculated as: 
Tax liability = Tax rate x Taxable income
Tax liability = 40% x $3,335 = $1,334

Finally, we can calculate the net cash flow: 
Net cash flow = Revenue increase - Tax liability
Net cash flow = $20,000 - $1,334
Net cash flow = $18,666

Therefore, the answer is (C) $18,666.

LISP Inc Is Planning to Purchase a New Mixer for $50,000