What is the after-tax cash flow in Year 3 for construction equipment costing $325,000, depreciated as MACRS 7-year property with a tax rate of 30%?

To calculate the after-tax cash flow in Year 3 for the construction equipment, follow these steps:

1. Determine Annual Depreciation: Since the equipment is classified as MACRS 7-year property, we can utilize the MACRS depreciation rates for Year 3. For MACRS 7-year property, the Year 3 rate is typically around 14.29%.

Annual depreciation = Cost of equipment × Depreciation rate

= $325,000 × 0.1429 ≈ $46,429

2. Calculate Tax Savings from Depreciation: This amount decreases taxable income, which means the tax savings can be calculated as:

Tax savings = Depreciation × Tax rate

= $46,429 × 0.30 ≈ $13,929

3. Calculate Operating Income (before tax): This calculation assumes certain project revenues. For instance, if the construction operation generates cash flow of $100,000 without considering taxes:

Earnings before tax = Cash inflow - Depreciation

= $100,000 - $46,429 ≈ $53,571

4. Calculate Taxes on Earnings: Given the tax rate of 30