1F.12
12.You have the following revenues and expenses for year 4 of a 5 year project:
| Revenues | $2000 |
| Operating Expenses | $1000 |
| Depreciation Expense | $1500 |
Your equipment has one year of straight-line depreciation left on it (year 5), but you have received an offer to buy it for $2500. You think this is a good offer, but you need to determine what your net after-tax cash flow this year will be if you accept it. Your company's tax rate is 40%. You have no other income besides this project this year, if you sell the machine, what will your net after-tax cashflow be for the year? (7 pts)
The machine has a Book Value of $1500 since it has 1
year of depreciation expense left. The capital gain on the
machine will be $2500-$1500=$1000. This will go with the rest of
the cash flows:
| Rev | 2000 |
| - Exp | 1000 |
| - Depr | 1500 |
| = Op Income | -500 |
| + Income from Sale | 1000 |
| =Total Income | 500 |
| - Tax (40%) | 200 |
| = AT Income | 300 |
| + Depr | 1500 |
| + Rest of CF from Sale | 1500 |
| = Total AT CF | 3300 |
The other way is to just take the CF's and subtract the tax you computed:
Operating CF + CF from Sale - Tax = 1000+2500-200=$3300.