Question

The Wet Corp. has an investment project that will reduce expenses by $30,000 per year for 3 years. The project's cost is $20,000. If the asset is part of the 3-year MACRS category (33.33% first year depreciation) and the company's tax rate is 27%, what is the cash flow from the project in year 1? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

• $25,160

• $23,150

• $23,700

• $24,480

Answer 1

Operating profit=Year1 savings-depreciation=30,000-(33.33%*Project cost)=30,000-(33.33%*20,000)

30,000-6666=23,334

After tax cashflows=Operating profit-(Tax rate*operating profit)=23,334-(27%*23334)=23,334-6300=17,034

Total operating cashflow=After tax cashflow+depreciation=17034+6666=23,700 (Option C is correct)

We have to add depreciation back because it is a non cash expense item which is shown for tax advantages and there will not be any actual cash outflow.