A profitable firm is considering a 7-year project that requires $135,000 of new equipment which will be depreciated as MACRS 5-year property, after which time it will be worthless. When will this equipment affect the project's cash flows?
A) Every year for 5 years
B) At the time of purchase only
C) Every year for 6 years
D)Every year for 7 years

Question

Quizplus · Accepted Answer

The equipment will affect the project's cash flows every year for 6 years because it will be depreciated as 5-year MACRS property. After 5 years, the equipment will have a zero book value, but it will still have an economic value if it can continue to be used in the project. Therefore, the equipment will continue to affect the project's cash flows for one more year, even though it has no book value.

A Profitable Firm Is Considering a 7-Year Project That Requires