Question

4) Madison Woodworking Company bought a lathe for $75,000. It is being depreciated using MACRS with a three-year recovery period. Assuming that the lathe will lead to increased revenues of $50,000 per year, create a table showing the following items for each of years 0 through 4: before-tax cash flow; depreciation; taxable income; income tax; and after-tax cash flow. Assume a tax rate of 40%.

Answer 1

rate positively ..

	Computation of depreciation =
	Total cost =		75000
	year	1	2	3	3
	Depreciation rate	33.33%	44.45%	14.81%	7.41%
	Depreciation amt	24,998	33,338	11,108	5,558
	Computation of requirements
	year	0	1	2	3	4
A	Initial investment	-75000
	operating cash flow
i	Revenue		50,000	50,000	50,000	50,000
ii	depreciation		24,998	33,338	11,108	5,558
iii=i-ii	Taxable income		25,003	16,663	38,893	44,443
iv=iii*40%	Tax@ 40%		10,001	6,665	15,557	17,777
v=iii-iv	Profit after tax		15,002	9,998	23,336	26,666
B=v+ii	operating cash flow after tax		39,999	43,335	34,443	32,223
C=A+B	Net cash flow after tax	(75,000)	39,999	43,335	34,443	32,223