The WACC for a capital project is 10%. The after-tax operating cash flows are $50,000 each year for the next 3 years. The project is expected to have a 3-year-life and 0 salvage value. The economic income of the project during year 1 is:

A. 50,000.
B. 45,454.
C. 12,434.

Correct Answer: C

Economic income (year 1) = Cash flow - Economic depreciation = CF1 - (V₀ - V₁).
CF₁ = 50,000;
V₀ = 50,000/1.10¹ + 50,000/1.10² + 50,000/1.10³= 124,343
V₁= 50,000/1.10¹ + 50,000/1.10²= 86777.
Economic income (year 1) = 50,000 - (124,343 - 86,777) = 12,434.