Your new employer, Freeman 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 33.33%, 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 life. What is the Year 1 cash flow?

$\begin{array}{l}
\begin{array} { l }
\text { Equipment cost (depreciable basis) } \
\text { Sales revenues, each year }\
\text {Operating costs (excl. deprec.)}\
\text { Tax rate}
\end{array}
\begin{array} { l }
\$ 65,000 \
\$ 60,000 \
\$ 25,000 \
35.00\%
\end{array}
\end{array}$

Question

Your new employer, Freeman 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 33.33%, 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 life. What is the Year 1 cash flow?

$\begin{array}{l}
\begin{array} { l } 
\text { Equipment cost (depreciable basis) } \
\text { Sales revenues, each year }\
\text {Operating costs (excl. deprec.)}\
\text { Tax rate}
\end{array}
\begin{array} { l } 
\$ 65,000 \
\$ 60,000 \
\$ 25,000 \
35.00\%
\end{array}
\end{array}$

Quizplus · Accepted Answer

$\begin{array}{l}
\begin{array} { l } 
\text {Equipment cost}&\
\text {Depreciation rate}&\
\text { Sales revenues }& \
\text { - Operating costs (excl. deprec.) }&\
\text { - Depreciation }&\
\text { Operating income (EBTT) }& \
\text { - Taxes }&\text { Rate }=35 \%\
\text { After-tax EBIT }&\
\text { $ + $ Depreciation }&\
\text { Cash flow. Year 1 }&
\end{array}
\begin{array} { l } 
\$ 65,000 \
33.33 \%\
\$ 60,000 \
25,000 \
21,665 \
\$ 13,336 \
4,667\
\$ 8,667 \
21,665\
30,333
\end{array}
\end{array}$

Your New Employer, Freeman Software, Is Considering a New Project