Fitzgerald Computers is considering a new project whose data are shown below. Th

Question

Fitzgerald Computers is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years for a yearly rate of 33.333%. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?

Equipment cost (depreciable basis)    $64,772
Sales revenues, each year    $53,765
Operating costs (excl. deprec.)    $24,460
Tax rate    35.0%

Explanation / Answer

Therefore the projects year 1 cash flow is  $26,604.23

Year 1 Sales revenue $53,765 Operating costs $24,460 Depreciation $21,588.51 Operating income before tax $7,716.49 income tax $2,700.77 Income after tax $5,015.72 Cash flow from operations $26,604.23

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