A project will cut firm’s operating costs by $50,000. The project requires an initial investment of...

A project will cut firm’s operating costs by $50,000. The project requires an initial investment of $30,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach? a. $42,800 b. $35,125 c. $40,450 d. $38,930

Expert Solution

Dep per anum = [ Cost - salvage Value ] / Useful life

= [ $ 30000 - 0 ] / 4

= $ 7500

Operating Cash flow = EBIT ( 1 - Tax rate ) + Dep

EBIT = Income - Dep

= ( $ 50000 - $ 7500 ) ( 1 - 0.35 ) + $ 7500

= [ $ 42500 * 0.65 ] + $ 7500

= $ 27625 + $ 7500

= $ 35125

OPtion B is correct

jeff jeffy answered 2 years ago

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