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The Blue Lagoon is considering a project with a five-year life. The project requires $32,000 of...

The Blue Lagoon is considering a project with a five-year life. The project requires $32,000 of fixed assets that are classified as five-year property for MACRS. Variable costs equal 67 percent of sales, fixed costs are $12,600, and the tax rate is 34 percent. What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages?

Year 1 2 3    4    5

Sales $ 32,000 $ 34,500   $ 35,600 $ 38,900 $ 42,000

MACRS rate 20.00 32.00 19.20 11.52 11.52

Multiple Choice

−$1,806.67

$640.89

$1,311.16

$1,409.80

−$2,276.60

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Answer #1
Time line 0 1 2 3 4
Cost of new machine -32000
=Initial Investment outlay -32000
5 years MACR rate 20.00% 32.00% 19.20% 11.52%
Sales 32000 34500 35600 38900
Profits Sales-variable cost 10560 11385 11748 12837
Fixed cost -12600 -12600 -12600 -12600
-Depreciation =Cost of machine*MACR% -6400 -10240 -6144 -3686.4
=Pretax cash flows -8440 -11455 -6996 -3449.4
-taxes =(Pretax cash flows)*(1-tax) -5570.4 -7560.3 -4617.36 -2276.604
+Depreciation 6400 10240 6144 3686.4
=after tax operating cash flow 829.60 2679.70 1526.64 1409.796
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