Question

In: Finance

19. A firm is considering a new project that will generate cash revenue of $1,300,000 and...

19.

A firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%?

a.

$374,625
b.

$341,250
c.

$416,250
d.

$499,500

Solutions

Expert Solution

Correct answer is $416250.

Working

Calculation of Depreciation (Because Depreciation Saves Taxes)

Cost of Equipment = $300000

Usefull life = 4Year

Depreciation per year = 300000 / 4 = $ 75000

Particulars Amount ($)
Cash Revenue    1,300,000
Less: Cash Expenses        700,000
Earnings before Depreciation        600,000 (1300000-700000)
Less: Depreciation          75,000
Earnings after Depreciation        525,000 (600000-75000)
Less: Tax @ 35%        183,750 (525000*35%)
Earnings after Tax        341,250
Add: Depreciation          75,000
Cash flow in the Second Year        416,250

jeff jeffy answered 2 years ago
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