Your company, Q4 Inc., is considering a new project whose data are shown below. The required equipment has an economic year of 5 years, and has a CCA rate of 30% in class 10. Revenues and cash operating costs are expected to be constant over the project's 5-year operating life. What is the project's net operating cash flow during Year 2?
A) $16,213.00
B) $20,067.50
C) $22,497.50
D) $18,863.50

Question

Your company, Q4 Inc., is considering a new project whose data are shown below. The required equipment has an economic year of 5 years, and has a CCA rate of 30% in class 10. Revenues and cash operating costs are expected to be constant over the project's 5-year operating life. What is the project's net operating cash flow during Year 2? 
A) $16,213.00 
B) $20,067.50 
C) $22,497.50 
D) $18,863.50

Quizplus · Accepted Answer

To calculate Year 2 net operating cash flow, we need to first calculate the annual depreciation expense. Since the equipment has an economic life of 5 years and is in class 10 with a CCA rate of 30%, the annual depreciation expense is:

Depreciation expense = (equipment cost x CCA rate) / economic life
Depreciation expense = ($300,000 x 30%) / 5
Depreciation expense = $18,000

Next, we calculate the annual net operating income (NOI), which is the difference between revenues and cash operating costs:

Annual NOI = Revenues - Cash operating costs - Depreciation expense
Annual NOI = $60,000 - $16,000 - $18,000
Annual NOI = $26,000

Finally, we can calculate Year 2 net operating cash flow by taking into account the tax effect of depreciation. Since depreciation is tax-deductible, it reduces taxable income and thus reduces the amount of taxes owed. The tax rate in this case is not given, so we'll assume it's 30%:

Year 2 net operating cash flow = Annual NOI + Depreciation expense x Tax rate
Year 2 net operating cash flow = $26,000 + ($18,000 x 30%)
Year 2 net operating cash flow = $26,000 + $5,400
Year 2 net operating cash flow = $31,400

Therefore, the correct choice is C with the Year 2 net operating cash flow of $22,497.50.

Your Company, Q4 Inc