Question

These are all part of the same question

Consider the following capital budgeting and cash flow estimation problem. You have developed a new energy drink that uses various vegetables. The drink is called V-DRINK. You have an existing building that you are using to produce V-DRINK. The building is fully depreciated. You determine a need to buy $400,000 in equipment. Shipping and installation is an additional $50,000. Additionally you determine you will need to have $14,257 in inventory. What is the total initial outlay associated with the project?

The equipment cost (equipment plus shipping and installation) can be depreciated at the rate of 21% the first year. The remaining 5 years (years 2-6) the depreciation will be equal to $30,000 per year. What is the amount of depreciation in year 1?

Based on some market research you expect to sell around 200,000 bottles of V-Drink a year at wholesale price of $2.7. Operating costs (excluding depreciation) are expected to be 50% of revenue. The firms tax rate is 40%. What is the annual operating cash flow associated with this project in year 2. (Note you will need to factor in $30,000 in depreciation in year 2 from the prior question).

Answer 1

Initial Cash Outlay

Particulars	Amount
Cost of Equipment	$ 400,000.00
Add: Shipping and Installation	$ 50,000.00
Total Cost of Equipment	$ 450,000.00
Add: Working Capital Requirement	$ 14,257.00
Initial Outlay	$ 464,257.00

Depreciation for Year 1 = $ 450,000*21%

= $ 94,500

Operating Cash Flows for Year - 2

Particulars	Amount
Sales in Qty	200,000
Price Per Unit	$   2.70
Less: Operating Cost per unit	$   1.35
Operating profit per unit	$   1.35
Total Operating Profit	$ 270,000.00
Less: Depreciation for 2nd Year	$    30,000.00
Pre Tax Operating Profit	$ 240,000.00
Less: Tax @ 40%	$    96,000.00
Post Tax Operating Profit	$ 144,000.00
Add: Depreciation	$    30,000.00
Operating Cash Flows in Year 2	$ 174,000.00