The operating cash flow in year 1 is (Use the following information): A proposed

Question

The operating cash flow in year 1 is (Use the following information): A proposed power-saving equipment has a purchase price of $580,000. The equipment will be used in a four-year project but is classified as five-year MACRS property for tax purposes. The equipment is expected to save $280,000 before taxes per year in energy costs, and it will have a salvage value of $60,000 at the end of the project. To decide on the feasibility of the investment, the managers have ordered a series of tests to determine whether the proposed equipment will realize the required costs savings or not for a total cost of $18,000. The required rate of return on the equipment is 14% and it is expected to increase working capital by $45,000 at the beginning of the project. The tax rate is 35 percent and the MACRS depreciation schedule is as follows: Year 1 2 3 4 5 6 MACRS 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%

Question 5 options: 1) $222,600 2) $224,800 3) $232,875 4) $245,050

Explanation / Answer

All Amounts in $ Operating Cash Flow in Year 1 Book Value of Equipment for Depreciation purposes = $ 580,000 - $ 60,000 = $ 520,000 Depreciation for Year 1 = 20% of $ 520,000 = $ 104,000 Savings in Energy Costs 280000 Less : Depreciation 104000 Profits before Taxes 176000 Less : Tax Impact @ 35% 61600 114400 Add : Depreciation 104000 Operating Cash Flow 218400 Since $ 222,600 is closest to this value, hence that is considered as the correct solution

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.