Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?

The cash flow for year 1 = $ 30,333

Explanation:

To calculate year one depreciation,

Depreciation expense = cost of the asset * rate of first year depreciation

= 65000*33.33/100

= $21,664.50

To calculate the tax saving on depreciation,

Tax saving on depreciation = depreciation expense*tax rate

= 21,664.50*35/100

= $ 7,582.575

Sales revenue = $ 60,000

Less: operating expense = $25,000

Profit before tax = $35,000

Less: tax expense at 35% on $35,000 = $ 12,250

Profit after tax = $22,750

Add: tax saving on depreciation = $ 7,582.575

Cash flow for year 1 = $22,750+$ 7,582.575

= 30,332.575 or 30,333

The cash flow for year 1 = $ 30,333