Delta Software is considering a new project whose data are shown below. The equipment that would be used 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 operating cash flow during Year 1?
Equipment cost (depreciable basis) $75,000
Straight line depreciation rate 33.33%
Sales $60,000
Operating costs excl. depr’n $25,000
Tax rate 35%
(Points: 4)
$27,000
$28,500
$30,000
$31,500
$33,000
the answer is $31,500
To calculate the project's operating cash flow during Year 1, we need to consider the sales, operating costs excluding depreciation, and the tax rate.
First, let's calculate the depreciation expense. The depreciable basis is $75,000 and the straight-line depreciation rate is 33.33%.
Depreciation Expense = Depreciable Basis * Depreciation Rate
Depreciation Expense = $75,000 * 33.33%
Depreciation Expense = $25,000
Next, let's calculate the taxable income. The taxable income is the sales minus the operating costs excluding depreciation minus the depreciation expense.
Taxable Income = Sales - Operating Costs excl. Depreciation - Depreciation Expense
Taxable Income = $60,000 - $25,000 - $25,000
Taxable Income = $10,000
Now, let's calculate the taxes. The tax rate is 35%.
Taxes = Taxable Income * Tax Rate
Taxes = $10,000 * 35%
Taxes = $3,500
Finally, let's calculate the operating cash flow during Year 1.
Operating Cash Flow = Sales - Operating Costs excl. Depreciation - Taxes
Operating Cash Flow = $60,000 - $25,000 - $3,500
Operating Cash Flow = $31,500
Therefore, the project's operating cash flow during Year 1 is $31,500.
To calculate the project's operating cash flow during Year 1, we need to consider the following information:
Equipment cost (depreciable basis): $75,000
Straight line depreciation rate: 33.33%
Sales: $60,000
Operating costs excl. depr'n: $25,000
Tax rate: 35%
First, let's calculate the annual depreciation expense:
Annual depreciation expense = Equipment cost * Depreciation rate
Annual depreciation expense = $75,000 * 33.33% = $25,000
Next, we need to calculate the operating profit before taxes:
Operating profit before taxes = Sales - Operating costs excl. depr'n - Depreciation expense
Operating profit before taxes = $60,000 - $25,000 - $25,000 = $10,000
Now, let's calculate the taxes:
Taxes = Operating profit before taxes * Tax rate
Taxes = $10,000 * 35% = $3,500
Finally, we can calculate the operating cash flow during Year 1:
Operating cash flow = Operating profit before taxes - Taxes + Depreciation expense
Operating cash flow = $10,000 - $3,500 + $25,000 = $31,500
Therefore, the project's operating cash flow during Year 1 is $31,500.