Question: Fitzgerald Computers is considering a new project whose data are shown

Question

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. 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)

$65,000

Straight-line depreciation rate

33.333%

Sales revenues, each year

$60,000

Operating costs (excl. deprec.)

$25,000

Interest Expense

$4,000

Tax rate

35.0%

A

$28,115

B

$28,836

C

$29,575

D

$30,333

E

$31,092

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. 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)

$65,000

Straight-line depreciation rate

33.333%

Sales revenues, each year

$60,000

Operating costs (excl. deprec.)

$25,000

Interest Expense

$4,000

Tax rate

35.0%

A

$28,115

B

$28,836

C

$29,575

D

$30,333

E

$31,092

Explanation / Answer

Calculation of Year 1 cash Flows Sales 60000 Less: Operating Costs -25000 Less: Interest Expense Less: Depreciation -21667 Net Profit 13333 Less: Taxes @35% 4667 Profit after taxes 8666 Add: Depreciation 21667 Cash Flows in Year 1 30333 The correct answer is D. $ 30,333 Cash Flows in Year 1 is $ 30,333/-

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