Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $16
ID: 2764347 • Letter: L
Question
Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $162,000 per year. Direct production costs are $54,000, and the fixed costs of maintaining the lawn mower factory are $22,000 a year. The factory originally cost $1.35 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 30%.(Enter your answer in dollars not in millions.)
Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $162,000 per year. Direct production costs are $54,000, and the fixed costs of maintaining the lawn mower factory are $22,000 a year. The factory originally cost $1.35 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 30%.(Enter your answer in dollars not in millions.)
Explanation / Answer
Cost of factory = $1,350,000
Annual depreciation = $1,350,000/25 years = $54,000
Net income before taxes = Revenue - Direct production costs - Fixed costs - Depreciation expense = $162,000 - $54,000 - $22,000 - $54,000 = $32,000
Tax rate = 30%
Income after taxes = $32,000 * (1 - 0.30) = $22,400
Operating cash flows from the project = Income after taxes + Depreciation = $22,400 + $54,000 = $76,400
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