Jack Sparrow Company buys a piece of equipment for $36,512 that will last for 10

Question

Jack Sparrow Company buys a piece of equipment for $36,512 that will last for 10 years. The equipment will generate cash flows of $7,000 per year and will have no salvage value at the end of its life. Ignore taxes unless told to include them.

Reference: Ref 9-1

Using straight-line depreciation over the life of the asset, what is the after tax cash flow in year 3? Assume a 30% tax rate and that the original cash flow was before tax.

$3,349

$2,344

$4,900

$5,995

A.

$3,349

B.

$2,344

C.

$4,900

D.

$5,995

Explanation / Answer

Ans.After tax cash flow in year $2344 follows.

A

yr ACF $ DEP$ CFAD$ CFAT$ 1 7000 3651.2 3348.8 2344.16 2 7000 3651.2 3348.8 2344.16 3 7000 3651.2 3348.8 2344.16 4 7000 3651.2 3348.8 2344.16 5 7000 3651.2 3348.8 2344.16 6 7000 3651.2 3348.8 2344.16 7 7000 3651.2 3348.8 2344.16 8 7000 3651.2 3348.8 2344.16 9 7000 3651.2 3348.8 2344.16 10 7000 3651.2 3348.8 2344.16

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