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Your company, csus inc., is considering a new project whose data are shown below. the required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for years 1 through 4. revenues and other operating costs are expected to be constant over the project's 10-year expected operating life. what is the project's year 4 cash flow? question 13 options: equipment cost (depreciable basis) $70,000 sales revenues, each year $33,500 operating costs (excl. depr.) $25,000 tax rate 35.0%

O $6,154
O $5,864
O $7,240
O $7,312
O $8,398

User Talendar
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1 Answer

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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.

User Scorix
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