new product line starting in year 4. Lathe was bought two years ago when the pro

Question

new product line starting in year 4. Lathe was bought two years ago when the product line began for 160000. it is being depreaciated a a 3 year protepry. Lathe generate 98000 a year in gross income and costs 2000. Selling for 200000 at the end of this year (year 2) replacing with new lathe this year (year 2) adn put in in year . NEw lathe cost 180000 to buy, plus 4000 tear to operate and $160,000 of gross income each year. This new lathe is also three year property. and can be sold in year for 10000. Stae tax 10% and fdederal is 35%.

What is effective tax rate?

WHat is depreatio chrage for year 3

What is the CFAT for year 2

Explanation / Answer

Effective tax rate:

= 10%+35%

= 45%

Depreciation charge for year 3:

= $180,000*33.33%

= $60,000

CFAT for year 2:

Hence, total cash flows after taxes = $211,802.40 ($125,998.40+$85,804)

Sales $          98,000 Less: Costs $            2,000 Dereciation $          71,120 EBIT $          24,880 Less: Interest $                   -   Profit before tax (PBT) $          24,880 Less: Tax @45% $          11,196 Net income $          13,684 Add: Depreciation $          71,120 Operating cash flows (OCF) $          84,804

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