Cashflow: Year zero car

Suppose you have a firm that faces a 50% combined tax rate and that you purchase an $18,000 car, a five-year asset, in year zero. What is your change in net cash flow in year zero?

Answer

Depreciation = $18,000 x MACRS .2 = $3,600
Tax Savings = Depreciation $3,600 x Tax Rate .5 = $1,800
After Tax Cash Flow = Purchase of car -$18,000 + Tax Savings $1,800 = -$16,200

Make sure you have the negative sign. It is a decrease in net cash flow.

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