Your company, Acme Computer, is considering a new project whose data are shown b

Question

Your company, Acme Computer, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the MACRS 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 life. What is the project's operating cash flow during Year 4?

Equipment cost (depreciable basis) $75,000
MACRS rates, years 1-4 33% 45% 15% 7%
Sales $60,000
Operating costs excl. depr’n $25,000
Tax rate 35%

Explanation / Answer

Depreciation deduction for tax in fourth year = 0.07*75,000 = 5,250 Income taxes paid in fourth year = (60,000 – 25,000 – 5250)*0.35 = 10,412.50 Cash flow for fourth year = 60,000 – 25,000 – 10,412.50 = $24,587.50 Answer: $24,587.50

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