Whitestone Products is considering a new project whose data are shown below.The required equipment has a 3-year tax life,and the accelerated rates for such property are 33.33%,44.45%,14.81%,and 7.41% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life.What is the project's Year 4 cash flow? $$\begin{array} { l l }
\text { Equipment cost (depreciable basis) } & \$ 70,000 \
\text { Sales revenues, each year } & \$ 42,500 \
\text { Operating costs (excl. deprec.) } & \$ 25,000 \
\text { Tax rate } & 35.0 \%
\end{array}$$
A)$11,904
B)$12,531
C)$13,190
D)$13,850
E)$14,542

Question

Whitestone Products is considering a new project whose data are shown below.The required equipment has a 3-year tax life,and the accelerated rates for such property are 33.33%,44.45%,14.81%,and 7.41% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life.What is the project's Year 4 cash flow? $$\begin{array} { l l } 
\text { Equipment cost (depreciable basis) } & \$ 70,000 \
\text { Sales revenues, each year } & \$ 42,500 \
\text { Operating costs (excl. deprec.) } & \$ 25,000 \
\text { Tax rate } & 35.0 \%
\end{array}$$
A)$11,904
B)$12,531
C)$13,190
D)$13,850
E)$14,542

Quizplus · Accepted Answer

To calculate the Year 4 cash flow, we first determine the depreciation, operating income before taxes, taxes, and then the net income. The depreciation in Year 4 is 7.41% of $70,000, which is $5,187. The operating income before taxes is sales revenues minus operating costs minus depreciation, which is $42,500 - $25,000 - $5,187 = $12,313. Taxes are 35% of this amount, which is $4,309.55. The net income is the operating income before taxes minus taxes, which is $12,313 - $4,309.55 = $8,003.45. The cash flow is the net income plus depreciation, which is $8,003.45 + $5,187 = $13,190.50, rounded to $13,190.

Whitestone Products Is Considering a New Project Whose Data Are