Question

Equipment is purchased for $ 250,000 in year 0 and is expected to sell for $ 25,000 after 5 years of use. Suppose the company estimates income and expenses of the equipment for the following first year of operation: Income $ 600,000, Expenses $ 260,000, Depreciation $ 45,000. If the company pays taxes at a rate of 35%, what is the after-tax cash flow for the first year?

 

Answer 1

Depreciation is a tax deductible expense ,so tax will be paid from.income after depreciation reduction .

Net earnings before tax = income -Expenses-Depreciation

= 600,000-260,000-45000

=295,000

Tax payable = 295,000 *35 %

= 103250 $

Earnings after tax =295,000-103250

=191,750 $

Cash flow after taxes

= 191750+45000

=236,750 $