Question

A company is considering a new four-year project with an initial equipment investment of $72,001. The equipment belongs in a 30% CCA class and will be worthless at the end of the project. Annual cash sales are estimated at $136,800 with annual cash costs of $87,901. The tax rate is 34%. What is the project cash flow in the second year?

options:

	$30,900
	$28,506
	$38,516
	$20,394
	$41,406

Answer 1

Solution :-

Annual cash sales in second year = $136,800

Annual cash cost in second year = $87,901

Tax rate = 34% or 0.34

CCA rate = 30%

So, we have to calculate depreciation amount in year 2 .

Depreciation in year 1 will be half of 30% of $72,001

So , depreciation in year 1 = 0.5 of [ 0.3 × $72,001] = $10,800.15

Depreciation rate in year 2 will be applied on the balance reduced by depreciation in year 1

So, depreciation in year 2 =

= 30% of [ $72,001 - $10,800.15]

= 0.3 * $61,200.85

= $18,360.255 or $18,360.26

Cash flow in year 2 :-

= [ Sales - cost ] ( 1- tax rate) + depreciation ( tax rate)

=[ $136,800 - $87,901 ] (1-0.34) + $18,360.26 (0.34)

= $48,899 (0.66) + $6,242.4884

= $32,273.34 + $6,242.4884

= $38,515.8284

or $38,516 (approx)

So, cas flow in year 2 is $38,516