19. Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the MACRS rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year life. What is the operating cash flow for Year 1?


Equipment cost (depreciable basis) $65,000
Sales revenues, each year $60,000
Operating costs excl. depr'n $25,000
Tax rate 35.0%

Depreciation for the first year = 33% of equipments= 21450

Sales 60000
Less Operating costs 25000
Less Depreciation 21450
Profit before taxes 13550
Less taxes 4743
Profit after taxes 8808
Add Depreciation 21450
Cash flow after taxes 30258

To calculate the operating cash flow for Year 1, first, we need to determine the depreciation expense.

The MACRS rates for the equipment are 33% for Year 1, 45% for Year 2, 15% for Year 3, and 7% for Year 4. Since the equipment has a 3-year tax life, the depreciation expense for Year 1 can be calculated as:

Depreciation Expense for Year 1 = Equipment Cost x MACRS Rate for Year 1

Depreciation Expense for Year 1 = $65,000 x 33% = $21,450

Next, we need to calculate the operating income. The operating income is the difference between the sales revenues and the operating costs exclusive of depreciation.

Operating Income for Year 1 = Sales Revenues - Operating Costs excl. Depreciation

Operating Income for Year 1 = $60,000 - $25,000 = $35,000

Now, we can calculate the taxes paid. The taxes paid can be calculated by multiplying the operating income by the tax rate.

Taxes Paid for Year 1 = Operating Income x Tax Rate

Taxes Paid for Year 1 = $35,000 x 35% = $12,250

Lastly, the operating cash flow for Year 1 can be calculated as:

Operating Cash Flow for Year 1 = Operating Income - Taxes Paid + Depreciation Expense

Operating Cash Flow for Year 1 = $35,000 - $12,250 + $21,450 = $44,200

Therefore, the operating cash flow for Year 1 is $44,200.

To calculate the operating cash flow for Year 1, we need to consider the following factors:

1. Equipment cost: The depreciable basis of the equipment is $65,000.

2. MACRS rates: The MACRS rates for the equipment over its 3-year tax life are 33%, 45%, 15%, and 7% for Years 1 through 4.

3. Sales revenues: The sales revenues for each year of the project's 10-year life are $60,000.

4. Operating costs: The operating costs, excluding depreciation, are $25,000.

5. Tax rate: The tax rate is 35.0%.

To calculate the operating cash flow for Year 1, follow these steps:

Step 1: Calculate the annual depreciation expense using the MACRS rates. Since the equipment has a 3-year tax life, we will use the MACRS rates for Years 1, 2, and 3.

- Year 1 depreciation: $65,000 * 33% = $21,450

Step 2: Calculate the taxable income by subtracting the depreciation expense from the operating costs.

- Taxable income = Operating costs - Depreciation expense = $25,000 - $21,450 = $3,550

Step 3: Calculate the taxes payable by multiplying the taxable income by the tax rate.

- Taxes payable = Taxable income * Tax rate = $3,550 * 35.0% = $1,242.50

Step 4: Calculate the operating cash flow by subtracting the taxes payable from the sum of sales revenues and depreciation expense.

- Operating cash flow = Sales revenues + Depreciation expense - Taxes payable = $60,000 + $21,450 - $1,242.50 = $80,207.50