Fitzgerald Computers is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
$\begin{array} { l r }
\text { Equpment cost (depreciable basis) } & \text { \$65,000 } \
\text { Staight-line depreciation rate } & 33.333 \% \
\text { Sales revenue5, each year } & \text { \$60,000 } \
\text { Operating casts (excl. deprec.) } & 35,000 \
\text { Ter rate } & 35.0 \%
\end{array}$

Question

Fitzgerald Computers is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
 $\begin{array} { l r } 
\text { Equpment cost (depreciable basis) } & \text { \$65,000 } \
\text { Staight-line depreciation rate } & 33.333 \% \
\text { Sales revenue5, each year } & \text { \$60,000 } \
\text { Operating casts (excl. deprec.) } & 35,000 \
\text { Ter rate } & 35.0 \%
\end{array}$

Quizplus · Accepted Answer

$\begin{array}{l}
\begin{array} { l } 
\text { Equipment life, years}\
\text { Equipment cost}\
\text { Depreciation:}\
\
\text { Sales revenues}\
\text { - Basis $ \times $ rate $ = $ depreciation}\
\text { - Operating costs (excl. deprec.)}\
\text { Operating income (EBIT)}\
\text { - Taxes}\
\text { After-tax EBIT}\
\text { $ + $ Depreciation}\
\text { Cash flow. Year 1}\
\end{array}
\begin{array} { l } 
&3\
&\$ 65,000 \
\text { Rate }=33.333 \%&\$ 21,667 \
\
&\$ 60,000 \
&21,667 \
&25,000 \
&\$ 13,333 \
\text { Rate }=35.0 \%&\$ 4,667 \
&\$ 8,667 \
&21,667\
&\$ 30,333
\end{array}
\end{array}$

Fitzgerald Computers Is Considering a New Project Whose Data Are