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Falcon Corp
Falcon Corp. is considering the purchase of a $50,000 pitching machine for a new entertainment endeavor. The company expects new revenue of $12,000 and costs of $3,800 annually. The project is being evaluated over a four year life, when the machine is expected to be worth $14,000. The firm's cost of capital is 4% and its tax rate is 21%. 5-Year MACRS 2 .32 .192 .1152 .1152 .0576 at is the operational cash flow in Year 3?
Expert Solution
Cash flow in Year 3 = (revenues - costs - depreciation)(1-tax rate) + depreciation
= (12000 - 3800 - 50,000*0.192)(1-21%)+ 9600
= $8,494
Note: Depreciation is a non cash expense and does not lead to outflow of cash
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