Chapter 10, Problem 1PROB

Summary Introduction

MACRS stands for modified accelerated cost recovery system. Life of the asset will be classified as per the internal revenue code.

Three years MACRS rates, Year 1: 33.33%, Year 2: 44.45%, Year 3: 14.81% and Year 4: 7.41%.

CWC bought machine that is expected to generate $25,000 in operating income before depreciation expenses each year. The cost of machine is $600,000 falls under three years MACRS class.

Explanation of Solution

a.

Calculate the after tax operating income as follows:

Formulas:

b.

Calculate the operating cash flows for year 1 as follows:

$\begin{array}{c}\text{Operating cashflows}=\text{After tax operating income}+\text{Depreciation}\\ \text{\hspace{1em}\hspace{1em} =}-\$1,002.00+\$26,670.00\\ =\$25,\mathrm{668.00\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em} }\end{array}$

Therefore, the operating cash flows in year 1 is $\boxed{\$25,668.00}$.

Calculate the operating cash flows for year 2 as follows:

$\begin{array}{c}\text{Operating cashflows}=\text{After tax operating income}+\text{Depreciation}\\ \text{ =}\$9,668.40+\$8,886.00\\ =\$18,\mathrm{554.40\hspace{1em}\hspace{1em} \hspace{1em}\hspace{1em}}\end{array}$

Therefore, the operating cash flows in year 2 is $\boxed{\$18,554.40}$.