Question

36. You are evaluating a potential investment in equipment. The equipment's basic price is $133,000, and shipping costs will be $4,000. It will cost another $20,000 to modify it for special use by your firm, and an additional $8,000 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 24,800 at the end of three years. The equipment is expected to generate revenues of $127,000 per year with annual operating costs of $58,000. The firm's marginal tax rate is 20.0%. What is the after-tax operating cash flow for year 1?

Answer 1

Sales	$         127,000
Less:
Costs	$           58,000
Depreciation	$           54,450	=(133000+4000+20000+8000)*33%
EBT	$           14,550
Less: Tax payable @ 20%	$              2,910
Net income	$           11,640
Add: Depreciation	$           54,450
Operating cash flow	$ 66,090