Question

Swindler Ltd has completed a feasibility study costing $18,244 to determine if there is any benefit in purchasing a new asset. The machine will cost $378,340 and an additional $11,277 will need to be spent to have the machine in an operational state. Before the machine can be used staff must be trained at a further cost of $7,308.

The project is expected to last for 5 years and the Taxation Office has confirmed this. At the end of the project, the machine will be fully depreciated.

Initial advertising costs are expected to $40,879 and additional stock of $70,421 will be needed. Wages will change from $85,000 to $55,041 and Fixed Costs will remain at $55,773.

The new machine is expected to produce sales of $1,874,920 in the first year and will grow by 13% each year of the project. Material costs will be 25% of sales in each year.

You are required to calculate the net cash flow (round to the nearest dollar and DO NOT include $ sign) that would appear in Year 1 of a Capital Budget.  

Assume the Australian Company tax Rate applies.

Answer 1

NET CASH FLOW =966132.26

NET CASH FLOW In YEAR 1
	Cash Flows:
	Sales Revenue from new machine	1874920
	Material Cost (24%)	-449980.8	(1874920*24%)
	Initial advertising cost	-40879
	Training cost	-7308
	Increase in wages	-29959	(85000-55041)
	Increase in fixed costs	0
	Depreciation expense	-77923.4	(378340+11277)/5
	SUM	1268869.8
	Before tax incremental profit	1268869.8
	Tax expense(30%)	380660.94	(1268869.8*30%)
	Operating profit after tax	888208.86	(1268869.8-380660.94)
	Add Depreciation (no tax expense)	77923.4
	Net Cash Flow in Year 1	966132.26	(888208.86+77923.4)
	NOTE:
	Initial investment in machine	333052	(378340+11277)
	Useful Life in years	5
	Annual depreciation rate =(100/5)%	20%
	Annual depreciation	77923.4	(333052*20%
	Feasibility study cost is sunk cost and not a relevant cost
	Additional stock is part of initial investment in working capital in year 0