Question

Monocle Corporation is considering an investment in equipment for $50,000. Data related to the investment is...

Monocle Corporation is considering an investment in equipment for $50,000. Data related to the investment is as follows:

Cash Flow before
Year Depreciation and Taxes
1 $ 25,000
2 25,000
3 25,000
4 25,000


Monocle uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 35 percent and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the annual cash flow for Year 1?

Homework Answers

Answer #1

Annual cash flow for Year 1 = $ 20,625

Particulars

Amount (in $)

Cash Flow before Depreciation and Taxes

$25,000

Less : Depreciation*

($12,500)*

Cash Flow before Tax

$12,500

Less : Tax at 35%

($4,375)

Cash Flow After Tax

$8,125

Add Back : Depreciation

$12,500

Net Annual Cash Flow

$ 20,625

*Depreciation under straight line method = [ Cost – Salvage Value ] / Useful life

= [ $50,000 – 0 ] / 4 Years

= $12,500 per year

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