(Calculating free cash flows) Vandelay Industries is considering a new project with a 6-year life with the following cost and revenue data. This project will require an investment of $120,000 in new equipment. This new equipment will be depreciated down to zero over 6 years using the simplified straight-line method and has no salvage value. This new project will generate additional sales revenue of $122,000 while additional operating costs, excluding depreciation, will be $62,000. Vandelay\'s marginal tax rate is 35 percent. What is the project\'s free cash flow in year 1? The project\'s free cash flow in year 1 is $(Round to the nearest dollar.)
Depreciation under the SL method = Investment cost / Life years
= $120,000 / 6
= $20,000
Before-tax cash flow (BTCF) = Revenues – Additional O.C – Depreciation
= 122,000 – 62,000 – 20,000
= $40,000
Tax amount = BTCF × tax rate
= 40,000 × 35%
= $14,000
After-tax cash flow (ATCF) = BTCF – Tax amount
= 40,000 – 14,000
= $26,000
Free cash flow = ATCF + Depreciation
= 26,000 + 20,000
= $46,000 (Answer)
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