The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's combined tax rate is 25%, what is the cash flow from the project in year 1?

Question

Quizplus · Accepted Answer

The cash flow in year 1 is calculated by adding the tax savings from depreciation to the after-tax savings from reduced expenses. Depreciation for year 1 is $55,000 * 33% = $18,150. Tax savings from depreciation is $18,150 * 25% = $4,537.50. After-tax savings from reduced expenses is $25,000 * (1 - 0.25) = $18,750. Total cash flow = $18,750 + $4,537.50 = $23,287.50, rounded to $23,287.