The Wet Corp. has an investment project that will produce cash flows of $20,000 per year for three years. Assume the only expense is depreciation on the asset purchased and this will be $5,000 per year. The company's tax rate is 34%. What is the cash flow from the project in year 1?
How much will Pauline pay in interest if she takes out a simple interest loan with a principal of $3,900 at 7.2% for three years?
To determine the cash flow from the project in year 1, we need to calculate the net cash flow after accounting for the depreciation expense and taxes.
Step 1: Calculate the taxable income.
Taxable income = Cash flows - Depreciation expense
In this case, the cash flows are $20,000 per year, and the depreciation expense is $5,000 per year.
Taxable income = $20,000 - $5,000 = $15,000
Step 2: Calculate the taxes paid.
Taxes paid = Taxable income * Tax rate
The tax rate is given as 34% or 0.34.
Taxes paid = $15,000 * 0.34 = $5,100
Step 3: Calculate the net cash flow.
Net cash flow = Cash flows - Taxes paid
In this case, the cash flows are $20,000 per year, and the taxes paid are $5,100.
Net cash flow = $20,000 - $5,100 = $14,900
Therefore, the cash flow from the project in year 1 is $14,900.