Telstar Communications is going to purchase an asset for $560,000 that will prod

Question

Telstar Communications is going to purchase an asset for $560,000 that will produce $270,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule in Table 12

Telstar Communications is going to purchase an asset for $560,000 that will produce $270,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule in Table 12

Explanation / Answer

Year 1 Year 2 Year 3 Year 4 Earnings before depreciation and taxes $                270,000 $                270,000 $                270,000 $                270,000 Less: Depreciation (33.30%, 44.50%, 14.80% and 7.40%) $              (186,480) $              (249,200) $                (82,880) $                (41,440) Earnings before taxes $                  83,520 $                  20,800 $                187,120 $                228,560 Less: Taxes @ 30% $                (25,056) $                  (6,240) $                (56,136) $                (68,568) Earnings after taxes $                  58,464 $                  14,560 $                130,984 $                159,992 Add: Depreciation $                186,480 $                249,200 $                  82,880 $                  41,440 Cash Flow $                244,944 $                263,760 $                213,864 $                201,432

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