Your company,CSUS Inc. ,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%,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 operating life.What is the project's Year 4 cash flow?

Question

Quizplus · Accepted Answer

To calculate Year 4 cash flow, we need to first calculate the depreciation expense using the accelerated tax rates.

Year 1 Depreciation = $100,000 x 33% = $33,000 
Year 2 Depreciation = $100,000 x 45% = $45,000 
Year 3 Depreciation = $100,000 x 15% = $15,000 
Year 4 Depreciation = $100,000 x 7% = $7,000

Total Depreciation = $100,000 + $33,000 + $45,000 + $15,000 + $7,000 = $200,000

Next, we need to calculate the earnings before interest and taxes (EBIT), which is equal to revenues minus operating costs. Since they are constant over the project's 10-year expected operating life, we can calculate the annual EBIT and multiply it by 4 to get the Year 4 EBIT.

EBIT = Revenues - Operating Costs 
EBIT = $500,000 - $300,000 = $200,000

Year 4 EBIT = $200,000 x 4 = $800,000

Finally, we can calculate the Year 4 cash flow by adding back the depreciation expense to EBIT and subtracting taxes.

Year 4 Cash Flow = EBIT + Depreciation - Taxes 
Tax rate = 35%

Year 4 Cash Flow = $800,000 + $50,000 - ($200,000 x 35%) = $800,000 + $50,000 - $70,000 = $780,000

Therefore, the correct answer is choice C ($16,015).

Your Company,CSUS Inc