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ek Country Club in San Marcos is considering purchasing a new 15. (10) Quail Cre

ID: 2513489 • Letter: E

Question

ek Country Club in San Marcos is considering purchasing a new 15. (10) Quail Cre fleet of golf carts for their business. The initial cost of the fleet will be $80,000, with a salvage value of $20,000 after 5 years. The increased revenue genera new fleet will be $22,000 per year for the 5 useful years of the fleet. Quail Creek is in the 39% tax bracket and the fleet will be depreciated using the Straight-Line (SL) Method. Given this information, complete the cash flow table below. Year Before-tax Deprecia TaxableTncome TaxAfter-tax Cash Flow tion ncome Cash Flow NA NA NA

Explanation / Answer

Answer:

Initial cost (year 0 cash out flow) =$80,000

Deprecation as per straight Line

=Cost-salvage value/ Life of assets

=80,000-20,000 /5

=60,000/5

=12,000 depreciation each year

Year

Before
tax cash
flow

Depreciation

Taxable
Income

Income tax

After Tax
Cash Flow

A

B

C=A-B

D=C*39%

E=C-D+C

0

-80,000

NA

NA

NA

-80,000

1

22,000

12000

10,000

3900

18,100

2

22,000

12000

10,000

3900

18,100

3

22,000

12000

10,000

3900

18,100

4

22,000

12000

10,000

3900

18,100

5

22,000

12000

10,000

3900

18,100

5

20,000

0

0

0

20,000

Year

Before
tax cash
flow

Depreciation

Taxable
Income

Income tax

After Tax
Cash Flow

A

B

C=A-B

D=C*39%

E=C-D+C

0

-80,000

NA

NA

NA

-80,000

1

22,000

12000

10,000

3900

18,100

2

22,000

12000

10,000

3900

18,100

3

22,000

12000

10,000

3900

18,100

4

22,000

12000

10,000

3900

18,100

5

22,000

12000

10,000

3900

18,100

5

20,000

0

0

0

20,000