Your New Employer, Freeman Software, Is Considering a New Project

question 21

Multiple Choice

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?

$\begin{array}{l}\begin{array} { l } \text { Equipment cost (depreciable basis) } \\\text { Sales revenues, each year }\\\text {Operating costs (excl. deprec.) }\\\text { Tax rate}\end{array}\begin{array} { l } \$ 65,000 \\\$ 60,000 \\\$ 25,000 \\35.00\%\end{array}\end{array}$

• A) $30,333
• B) $31,849
• C) $33,442
• D) $35,114
• E) $36,869

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Definitions:

Contractual Obligations

Duties that are legally binding and arise from agreements or contracts between two or more parties.

Abandonment

The act of voluntarily giving up a right, claim, or property without transferring it to another person and with no intention of reclaiming it.

Liquidated Damages

Damages agreed to by the parties to a contract in the event of a breach.

Custom-Make

To create or manufacture something according to specific requirements or specifications.