Final answer:
The project's year 1 cash flow for rmu inc. is calculated by subtracting the operating costs from the sales revenues to determine net income before taxes, then applying the tax rate to find taxes owed, and finally subtracting taxes from net income. The cash flow for year 1 in this case is $11,062.50.
Step-by-step explanation:
The student's question pertains to the calculation of a project's year 1 cash flow for a company named rmu inc. based on certain financial data and considering the new tax law provisions for bonus depreciation. Since the equipment used in the project is eligible for 100% bonus depreciation, this means the cost of the equipment is fully deducted from the taxable income at the beginning, which only leaves sales revenues, operating costs, and taxes to be considered in the cash flow calculation for the first year.
To calculate the project's year 1 cash flow, follow these steps:
Subtract the operating costs from the sales revenues to find the earnings before tax (EBT).
Calculate the taxes by applying the tax rate to the EBT.
Subtract the taxes from the EBT to obtain the net income.
Add back any non-cash deductions (such as depreciation) to the net income to get the cash flow.
Using the given data: The cash flow for year 1 would be calculated as follows:
Sales revenues: $26,750
Operating costs: $12,000
Tax rate: 25%
Earnings before taxes (EBT) = Sales revenues - Operating costs:
EBT = $26,750 - $12,000 = $14,750.
Taxes = EBT * Tax rate:
Taxes = $14,750 * 25% = $3,687.50.
Net income = EBT - Taxes:
Net income = $14,750 - $3,687.50 = $11,062.50.
However, due to 100% bonus depreciation, there are no depreciation expenses to add back. Thus, the project's year 1 cash flow simply equals the net income:
Cash Flow Year 1 = Net Income = $11,062.50.