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%
To calculate the project's operating cash flow during Year 1, we need to calculate the net operating income (NOI) and adjust it for depreciation and taxes.
1. Calculate the net operating income (NOI):
NOI = Sales - Operating costs excluding depreciation
NOI = $60,000 - $25,000
NOI = $35,000
2. Calculate the annual depreciation expense:
Depreciation expense = Equipment cost * Depreciation rate
Depreciation expense = $75,000 * 33.33%
Depreciation expense = $25,000
3. Calculate the taxable income:
Taxable income = NOI - Depreciation expense
Taxable income = $35,000 - $25,000
Taxable income = $10,000
4. Calculate the tax expense:
Tax expense = Taxable income * Tax rate
Tax expense = $10,000 * 35%
Tax expense = $3,500
5. Calculate the operating cash flow:
Operating cash flow = NOI - Tax expense
Operating cash flow = $35,000 - $3,500
Operating cash flow = $31,500
Therefore, the project's operating cash flow during Year 1 is $31,500.