Telstar Communications is going to purchase an asset for $540,000 that will produce $260,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule in Table 1212. (This represents four years of depreciation based on the half-year convention.) The firm is in a 35 percent tax bracket.

Year 1. Year 2 Year 3 Year 4

Earnings before depreciation and taxes

Depreciation

Earnings before taxes

TaxesEarnings after taxes

Depreciation

Cash flow