The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's tax rate is 34%, what is the cash flow from the project in year 1?

Question

Quizplus · Accepted Answer

Year 1 depreciation = 33% * $55,000 = $18,150

Tax savings from depreciation = $18,150 * 34% = $6,171

Cash flow from the project in year 1 = Savings - Investment + Tax savings
= ($25,000) - ($55,000) + ($6,171)
= $22,671

Therefore, the cash flow from the project in year 1 is $22,671, and the best choice is C.