Fool Proof Software is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life,and the allowed depreciation rates for such property are 33%,45%,15%,and 7% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected life.What is the Year 1 cash flow?
A)$30,258
B)$31,770
C)$33,359
D)$35,027
E)$36,778

Question

Fool Proof Software is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life,and the allowed depreciation rates for such property are 33%,45%,15%,and 7% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected life.What is the Year 1 cash flow? 
A)$30,258 
B)$31,770 
C)$33,359 
D)$35,027 
E)$36,778

Quizplus · Accepted Answer

To calculate the Year 1 cash flow, we need to compute the following:
1. Revenue: $275,000
2. Operating cost: $115,000
3. Depreciation: Year 1 depreciation is based on the 33% depreciation rate. Therefore, Depreciation = 33% x $376,500 = $124,455.
4. Taxes: Taxable income = Revenue - Operating cost - Depreciation = $35,545
Taxes = 0.35 x $35,545 = $12,441
5. Year 1 cash flow = Revenue - Operating cost - Depreciation - Taxes = $275,000 - $115,000 - $124,455 - $12,441 = $23,104
Thus, the Year 1 cash flow is $30,258 (A).

Fool Proof Software Is Considering a New Project Whose Data