Question

The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for 3 years. The project's cost is $20,000. If the asset is part of the 3-year MACRS category (33.33% first year depreciation) and the company's tax rate is 34%, what is the cash flow from the project in year 1? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

$18,216

$19,546

$18,766

$20,226

Answer 1

Cost of Asset = $20,000

Depreciation, Year 1 = 33.33% * $20,000
Depreciation, Year 1 = $6,666

Annual Cost Saving = $25,000
Tax Rate = 34%

Operating Cash Flow, Year 1 = Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow, Year 1 = $25,000 * (1 - 0.34) + 0.34 * $6,666
Operating Cash Flow, Year 1 = $25,000 * 0.66 + 0.34 * $6,666
Operating Cash Flow, Year 1 = $18,766

So, cash flow from the project in year 2 is $18,766