The Blue Lagoon is considering a project with a five-year life.The project requires $32,000 of fixed assets that are classified as five-year property for MACRS.Variable costs equal 67 percent of sales,fixed costs are $12,600,and the tax rate is 34 ercent.What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages? $$\begin{array} { | l | r | r | r | r | r | }
\hline \text { Year } & & { 2 } &{ 3 } &{ 4 } & { 5 } \
\hline \text { Sales } & \$ 32,000 & \$ 34,500 & \$ 35,600 & \$ 38,900 & \$ 42,000 \
\hline \text { MACRS rate } & 20.00 & 32.00 & 19.20 & 11.52 & 11.52 \
\hline
\end{array}$$

Question

The Blue Lagoon is considering a project with a five-year life.The project requires $32,000 of fixed assets that are classified as five-year property for MACRS.Variable costs equal 67 percent of sales,fixed costs are $12,600,and the tax rate is 34 ercent.What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages? $$\begin{array} { | l | r | r | r | r | r | } 
\hline \text { Year } & &  { 2 } &{ 3 } &{ 4 } & { 5 } \
\hline \text { Sales } & \$ 32,000 & \$ 34,500 & \$ 35,600 & \$ 38,900 & \$ 42,000 \
\hline \text { MACRS rate } & 20.00 & 32.00 & 19.20 & 11.52 & 11.52 \
\hline
\end{array}$$

Quizplus · Accepted Answer

To calculate the operating cash flow, we need to calculate the following: 
Sales - variable costs - fixed costs - depreciation = earnings before taxes (EBT) 
EBT * (1 - tax rate) = net income 
Net income + depreciation = operating cash flow

Using the table given, we can calculate the MACRS depreciation for each year:

Year 1: $32,000 * 0.20 = $6,400 
Year 2: $32,000 * 0.32 = $10,240 
Year 3: $32,000 * 0.192 = $6,144 
Year 4: $32,000 * 0.1152 = $3,686.40 
Year 5: $32,000 * 0.1152 = $3,686.40

Now we can calculate the operating cash flow for Year 4:

Sales: $38,900 
Variable costs: 67% * $38,900 = $26,063 
Fixed costs: $12,600 
Depreciation: $3,686.40 
EBT: $38,900 - $26,063 - $12,600 - $3,686.40 = $-449.40 
Net income: $-449.40 * (1 - 0.34) = $-295.67 
Operating cash flow: $-295.67 + $3,686.40 = $3,390.73

Therefore, the correct answer is D) $1409.80.

The Blue Lagoon Is Considering a Project with a Five-Year