Question

Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $64,262.00. The lathe will generate revenues of $96,152.00 per year for five years. The cost of materials and labor needed to generate these revenues will total $48,052.00 per year, and other cash expenses will be $10,462.00 per year. The machine is expected to sell for $9,573.00 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Steamboat Springs' marginal tax rate is 38.00 percent, and its cost of capital is 12.00 percent. What is the project cash flow for the first year of the project?

Answer 1

Expenses = cost of materials and labor + other cash expenses

Tax = Tax rate*Profit

Depreciaiton Tax savings= Tax rate*Depreciation

Investment	64262
Life of investment	5
Annual Depreciation	12852.4
Annual Sale	96152
Expenses	58514
Profit	37,638
Tax rate	38%
Tax	14,302.44
Depreciaiton Tax savings	-4,883.91
Net tax payable	9,418.53
Cash flows for year 1	28,219.47