Question

Whitestone Products is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the MACRS rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Year 1 through Year 4. Revenues and other operating costs are expected to be constant over the project’s 10-year expected operating life. What is the project’s Year 4 cash flow?

Equipment cost (depreciable basis)	$50,000
Sales revenues, each year	$40,212
Operating costs (excluding depreciation)	$20,222
Tax rate	32%

Answer 1

The amount is computed as follows:

= (Sales revenue - operating cost - depreciation) x (1 - tax rate) + depreciation

Depreciation is computed as follows:

= Equipment cost x rate of depreciation in year 4

= $ 50,000 x 7.41%

= $ 3,705

So, the cash flow will be as follows:

= ($ 40,212 - $ 20,222 - $ 3,705) x (1 - 0.32) + $ 3,705

= $ 14,778.80