Final answer:
The project's year 4 cash flow for CSUS Inc. is $7,240, which combines both after-tax operating income and tax savings from depreciation.
Step-by-step explanation:
To calculate the project's year 4 cash flow for CSUS Inc., we need to consider the equipment's depreciation, operating costs, and tax implications on revenues.
Firstly, the remaining book value of the equipment going into year 4 is important for determining the depreciation expense in year 4. Since the equipment has a 3-year tax life and the year 4 depreciation rate is 7%, the book value at the beginning of year 4 is critical. However, this information isn't provided directly, but we can infer it. After 3 years, the cumulative depreciation would be 33% + 45% + 15% = 93%. Therefore, the book value at the start of year 4 would be 7% of the initial cost, or $4,900 ($70,000 x 7%). The depreciation expense for year 4 would be $4,900.
Secondly, depreciation reduces taxable income, so the tax savings from depreciation in year 4 would be the depreciation expense times the tax rate, which is $4,900 x 35% = $1,715.
Thirdly, the after-tax operating income is calculated by subtracting operating costs from sales revenues and then adjusting for taxes. This results in ($33,500 - $25,000) x (1 - 35%) = $5,525.
Lastly, the project's year 4 cash flow is the sum of after-tax operating income and the tax savings from depreciation. Thus, the project's year 4 cash flow is $5,525 + $1,715 = $7,240.