An asset in the five-year MACRS property class costs $150,000 and has a zero est

Question

An asset in the five-year MACRS property class costs $150,000 and has a zero estimated salvage value after six years of use. The asset will generate annual revenues of $320,000 and will require $80,000 in annual labor and $50,000 in annual material expenses. There are no other revenues and expenses. Assume a tax rate of 40%. Click the icon to view the MACRS depreciation schedules. Click the icon to view the interest factors for discrete compounding when i = 12% per year. (a) Compute the after-tax cash flows over the project life. Fill in the table below. (Round to two decimal places.)

Explanation / Answer

Woking notes:

(1) MACRS Depreciation schedule as follows.

(2) Before tax cash flow (BTCF) ($) =Annual revenue - Annual labor cost - Annual material cost

= 320,000 - 80,000 - 50,000

= 190,000

(3) Taxable income (TI) = BTCF - Annual depreciation

(4) Net income (NI) = TI x (1 - Tax rate) = TI x (1 - 0.4) = TI x 0.6

(5) After-tax cash flow (ATCF) = NI + Annual depreciation

Note that in year 0, ATCF = - $150,000

Therefore, ATCF is computed as follows.

Year Asset Cost ($) Depreciation Rate (%) Annual Depreciation ($) (A) (B) (C) = (A) x (B) 1 1,50,000 20 30,000 2 1,50,000 32 48,000 3 1,50,000 19.2 28,800 4 1,50,000 11.52 17,280 5 1,50,000 11.52 17,280 6 1,50,000 5.76 8,640

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