Final answer:
Nick Company's new fork-lift will generate cash flows of $41,000 in the first year, $30,500 in the second year, and $20,000 in the third year after accounting for depreciation, increased revenues and expenses, and taxes.
Step-by-step explanation:
To calculate the cash flows that Nick Company's new fork-lift will generate in each of the first three years, you need to account for additional revenues, increased expenses, depreciation, and taxes. The fork-lift costs $60,000 and is depreciated on a straight-line basis over three years, which means the annual depreciation expense would be $20,000 ($60,000 / 3 years).
In the first year, the additional cash revenue is $60,000 and the increased cash expenses are $10,000. The operating income before taxes is calculated as revenue ($60,000) minus expenses ($10,000) and depreciation ($20,000), which equals $30,000. After applying the tax rate of 30%, the net income is $21,000 ($30,000 - 30% of $30,000). The cash flow is then found by adding back the non-cash depreciation expense, resulting in a cash flow of $41,000 ($21,000 + $20,000).
In the second year, with $50,000 in additional revenue and $15,000 in increased expenses, the operating income before taxes is $15,000 ($50,000 - $15,000 - $20,000). After tax, the net income is $10,500 ($15,000 - 30% of $15,000). Adding back the depreciation gives a cash flow of $30,500 ($10,500 + $20,000).
The third year follows a similar process, with $40,000 in revenue and $20,000 in expenses. The operating income before taxes is $0 ($40,000 - $20,000 - $20,000). The net income after tax remains $0, and the total cash flow is $20,000, which is just the depreciation added back.
To summarize, the project will generate a cash flow of $41,000 in the first year, $30,500 in the second year, and $20,000 in the third year.