Question

Monocle Corporation is considering an investment in equipment for $50,000. Data related to the investment is as follows: Cash Flow before Year Depreciation and Taxes 1 $ 25,000 2 25,000 3 25,000 4 25,000 Monocle uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 35 percent and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the annual cash flow for Year 1

Answer 1

$20,625

Step-by-step explanation:

The computation of the annual cash flow for year 1 is shown below:

Cash Flow before Depreciation and Taxes $25,000

Less : Depreciation expense ($12,500)

Cash Flow before Tax $12,500

Less : Tax at 35% ($4,375)

Cash Flow After Tax $8,125

Add Back : Depreciation expenses $12,500

Net Annual Cash Flow $20,625

The depreciation expense is calculated below:

= ($50,000 - $0) ÷ 4 years

= $12,500

We simply applied the above format so that the annual cash flow for year 1 could come