Question

Donata Company purchased equipment for $30,000 in December 20x1. The equipment is expected to generate $10,000 per year of additional revenue and incur $2,000 per year of additional cash expenses, beginning in 20x2. Under MACRS, depreciation in 20x2 will be $3,000. If the firm's income tax rate is 40%, the after-tax cash flow in 20x2 would be: $6,000. $3,600. $3,200. $4,800. None of the answers is correct.

Answer 1

$6,000

Step-by-step explanation:

The cash flow of a company is different from the net income of the company because net income includes some non-cash items like depreciation etc., which should be adjusted to calculate the cash flow of the company. The depreciation is added back to the net income in order to adjust this non-cash expense in the net income to arrive at cash flow for the period.

First, we need to calculate the net income as follow

Additional Revenue _________ $10,000

Less: Additional Cash expenses $2,000

Less: Depreciation ___________$3,000

Income Before tax ___________ $5,000

Less: Tax 40% ( $5,000 x 40% ) _ $2,000

Net Income _________________$3,000

Now We need to calculate the cash fow as follow

Cash Flow in 20x2 = Net income of 20x2 + Depreciation

Cash Flow in 20x2 = $3,000 + $3,000

Cash Flow in 20x2 = $6,000