Question

You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $210,000. The trucks fall in the MACRS 5-year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 31,500 at the end of five years. The expected revenue associated with the trucks is $154,000 per year with annual operating costs of $74,000. The firm's marginal tax rate is 25.0%. What is the after-tax operating cash flow for year 5?

O $42,675
O $65.775
O $60,000
O $56.900
O $23,100

Answer 1

To calculate the after-tax operating cash flow for year 5, we determine depreciation using MACRS, subtract operating costs and depreciation from revenue to find taxable income, and apply the tax rate to calculate after-tax income. The after-tax operating cash flow for year 5 is $65,775.

Step-by-step explanation:

The after-tax operating cash flow for year 5 can be determined by considering the revenue, operating costs, depreciation, salvage value, and tax impacts. Firstly, we calculate the depreciation for year 5 using the MACRS 5-year class percentage (11% of $210,000), which is $23,100. Then, we compute the taxable income by subtracting both operating costs ($74,000) and depreciation ($23,100) from the revenue ($154,000).

This gives us a taxable income of $56,900. Finally, we calculate the after-tax income by subtracting taxes (25% of $56,900) from the taxable income, and adding back the depreciation.

The after-tax income is thus $42,675 + $23,100, which equals to $65,775. However, when the trucks are sold, there will also be a tax implication on the sale based on the difference between the sale price and the book value of the trucks. The book value at the end of year 5 would be zero since we fully depreciated the asset using MACRS. Therefore, the entire sale price is a gain, and you pay taxes on this gain at the tax rate of 25%. Subtracting the tax on the sale from the after-tax operating cash flow would give us the final cash flow.

As the question does not require this final step, the answer for the after-tax operating cash flow before sale is $65,775.