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%. 1. $27,000, 2. $28,500, 3. $30,000, 4. $31,000, 5. $33,000
To calculate the project's operating cash flow during Year 1, we need to consider several factors.
1. Start by determining the annual depreciation expense. In this case, the equipment cost is $75,000, and the straight-line depreciation rate is 33.33%. So, the annual depreciation expense would be calculated as follows:
Annual Depreciation Expense = Equipment Cost * Depreciation Rate
Annual Depreciation Expense = $75,000 * 33.33% = $25,000
2. Next, calculate the operating profit before taxes. It is obtained by subtracting the depreciation expense from the operating costs (excluding depreciation) and then subtracting it from the sales revenue:
Operating Profit Before Taxes = Sales - (Operating Costs excl. Depreciation + Depreciation Expense)
Operating Profit Before Taxes = $60,000 - ($25,000 + $25,000) = $10,000
3. Calculate the taxes paid by multiplying the tax rate by the operating profit before taxes:
Taxes = Tax Rate * Operating Profit Before Taxes
Taxes = 35% * $10,000 = $3,500
4. Finally, calculate the operating cash flow by subtracting taxes from the operating profit before taxes:
Operating Cash Flow = Operating Profit Before Taxes - Taxes
Operating Cash Flow = $10,000 - $3,500 = $6,500
Therefore, the project's operating cash flow during Year 1 is $6,500.
Please note that this answer assumes that there are no other factors affecting the cash flow, such as interest expenses or changes in working capital.