Question

A firm is considering leasing or buying a mower. The mower costs $1000 and can be depreciated according to the MACRS 3 year depreciation schedule (33%; 45%; 15%; and 7%). A maintenance contract will be purchased for $61 per year payable at the start of each year for 4 years. At the end of the fourth year the mower is expected to have a value of $300. The firm is taxed at 30% What is the operating cash flow associated with the purchase of this asset at the end of the first year?

Answer 1

Cost of Equipment = $1,000

Calculation of Depreciation under MACRS :

Year	MACRS %	Depreciation = Cost of Equipment * MACRS %
1	33	330
2	45	450
3	15	150
4	7	70

Calculation of operating cash flow associated with the purchase of this asset at the end of the first year.

PARTICLUARS	Operating Cash Flow at Year 1
Maintenance Contract Charges	$61
Depreciation	$330
EBIT	-$391
Income Tax @ 30%	117.3
Unlevered Net Income	-$273.7
ADD : Depreciation	330
Operating Cash Flow	$56.7