Cash Flow versus Net Income

A company buys a numerically controlled (NC) machine for $28,000 (year 0) and uses it for five years, after which it is scrapped. The allowed depreciation deductionduring the first year is $4,000, as the equipment falls into the category of seven yearMACRS property. (The first year depreciation rate is14.29 %.) The cost of the goodsproduced by this NC machine should include a charge for the depreciation of the machine.Suppose the company estimates the following revenues and expenses, includingdepreciation, for the first operating year:

Gross income = $50,000,

Cost of goods sold = $20,000,

Depreciation on NC machine = $4,000,

Operating expenses = $6,000.

(a) If the company pays taxes at the rate of 40% on its taxable income, what is its net income from the project during the first year?

(b) Assume that (1) all sales are cash sales and (2) all expenses except depreciation were paid during year 1. How much cash would be generated from operations?