Question

1/ Assume a corporation has earnings before depreciation and taxes of $105,000, depreciation of $45,000, and that it has a 35 percent tax bracket. What are the after-tax cash flows for the company?

$87,800

$88,600

$78,800

$84,000

2/ The Wet Corp. has an investment project that will reduce expenses by $20,000 per year for 3 years. The project's cost is $30,000. If the asset is part of the 3-year MACRS category (33.33% first year depreciation) and the company's tax rate is 29%, what is the cash flow from the project in year 1? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

$16,550

$17,100

$17,880

$18,560

3/ An asset fitting into the 7-year MACRS category was purchased 2 years ago for $100,000. The book value of this asset is now (Do not round intermediate calculations.)

$75,420

$56,020

$65,820

$61,220

Answer 1

Answer to Question 1:

After-tax Cash Flows = Earnings before depreciation and taxes * (1 - tax) + tax * Depreciation
After-tax Cash Flows = $105,000 * (1 - 0.35) + 0.35 * $45,000
After-tax Cash Flows = $68,250 + $15,750
After-tax Cash Flows = $84,000

Answer to Question 2:

Cost of Project = $30,000

Depreciation, Year 1 = 33.33% * $30,000
Depreciation, Year 1 = $9,999

Cash Flows = Cost Saving * (1 - tax) + tax * Depreciation
Cash Flows = $20,000 * (1 - 0.29) + 0.29 * $9,999
Cash Flows = $14,200 + $2,900
Cash Flows = $17,100

Answer to Question 3:

Cost of Asset = $100,000

Depreciation, Year 1 = 14.29% * $100,000
Depreciation, Year 1 = $14,290

Depreciation, Year 2 = 24.49% * $100,000
Depreciation, Year 2 = $24,490

Book Value = $100,000 - $14,290 - $24,490
Book Value = $61,220