Keira Knightley Company buys a piece of equipment for $36,442 that will last for

Question

Keira Knightley Company buys a piece of equipment for $36,442 that will last for 7 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 9-2

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.

$1,256

$1,794

$4,900

$6,462

$1,256

$1,794

$4,900

$6,462

Explanation / Answer

Depreciation of equipment =$(36,442/7)

=$5206

Cash flow for 3rd year =$7000

Thus net flow =$(7000-5206)

=$1794

Thus,after tax cash flow in year 3=1794*70%

=$1256 (approx)(A)

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