Question

he Wet Corp. has an investment project that will reduce expenses by $25,000 per year for 3 years. The project's cost is $15,000. If the asset is part of the 3-year MACRS category (33.33% first year depreciation) and the company's combined tax rate is 38%, what is the cash flow from the project in year 1

Answer 1

$17,400

Step-by-step explanation:

The project cash flow can be derived using the below formula:

project cash flow=after tax cash flow+depreciation

The after-tax cash flow=(reduction in expenses-depreciation)*(1-tax rate)

reduction in expenses=$25,000

depreciation for year 1=$15,000*33.33%

depreciation for year 1=$5,000

tax rate =38%

The after-tax cash flow=($25,000-$5,000)*(1-38%)

The after-tax cash flow=$12,400

The project cash flow in year=$12,400+$5,000=$17,400