Unique Style Inc.is considering a five-year expansion project that requires an initial investment of $500,000 for the purchase of a new machine with a CCA rate of 30%.The projected sales revenue and related costs are $450,000 and $180,000 per year, respectively.The project's fixed costs are an additional $48,000 per year.The appropriate discount rate is 8%.The firm's marginal tax rate is 40%.What is the after-tax cash flow in year three, assuming accelerated investment incentive is applicable for CCA in year 1?

Question

Quizplus · Accepted Answer

The correct answer is A. The after-tax cash flow in year three is $156,300.Explanation:The after-tax cash flow in year three is calculated as follows:Sales revenue: $450,000Less: Variable costs: $180,000Contribution margin: $270,000Less: Fixed costs: $48,000EBIT: $222,000Less: Depreciation: $500,000 * 30% * 3 = $45,000Taxable income: $177,000Less: Taxes (40%): $70,800Net income: $106,200Add: Depreciation: $45,000Cash flow from operations: $151,200Add: After-tax salvage value: $500,000 * (1 - 30%) * (1 - 40%) = $180,000After-tax cash flow in year three: $151,200 + $180,000 = $331,200