The wet corp has an investment project that will reduce expenses by $25,000 per
ID: 2777577 • Letter: T
Question
The wet corp has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's tax rate is 34%, what is the cash flow from the project in year 1? The wet corp has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's tax rate is 34%, what is the cash flow from the project in year 1?Explanation / Answer
The project cost if $55000 which is spread over the life of the project.
so the depreciation for the first year at 33% = $55000 * 33% = $18150
Company tax rate is 34%
and savings = $25000
Therefore,
EBIT = Savings-Depreciation = $25000-$18150 = $6850
and taxes = $6850*34% = $2329
So earning after tax = EAT = $6850 -$2329 = $4521
and hence cash flow for the first year = EAT + Depreciation = $4521 + $18150 = $22671
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