Question
In: Finance
The U.S. government has decided to decrease the corporate tax rate from 35% to 20% (for...
The U.S. government has decided to decrease the corporate tax rate from 35% to 20% (for the record, I originally wrote this problem long before this actually happened). You have been tasked with re-estimating the remaining PV of a project’s cash flows. The project will operate for the next 4 years before shutting down. It will produce yearly revenue of $40k with yearly operating costs of $20k. The project utilizes some heavy machinery which has a current book value of $80k and is being depreciated on a straight-line basis by $15k per year for the remainder of the project. (IMPORTANT: This does not mean that you purchase the machine today for $80k. You bought the machine in the past when you started the project). The machinery will have a resell value of $30k at the completion of the project. The firm’s discount rate is 10%.
- Show how much each of the project’s OCFs will change on a timeline once the tax rate is decreased.
- Compute the after-tax salvage both before and after the tax change.
Solutions
Expert Solution
CASH FLOW WHEN TAX RATE IS 35%
| YEAR | INFLOW-REVENUE | OUTFLOW-OPERATIONG COST | DEPRECIATION | NET FLOWS BEFORE TAX | TAX @ 35% | NET FLOWS AFTER TAX | DISCOUNT FACTOR @10% | DISCOUNTED CASH FLOWS | DISCOUNTED CASH FLOWS AFTER DEPRECIATION IE CFAT |
| 1 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1750 | 3,250.00 | 0.909 | 2954.545 | 17,954.55 |
| 2 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1750 | 3,250.00 | 0.826 | 2685.950 | 17,685.95 |
| 3 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1750 | 3,250.00 | 0.751 | 2441.773 | 17,441.77 |
| 4 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1750 | 3,250.00 | 0.683 | 2219.794 | 17,219.79 |
| TERMINAL FLOWS AT YEAR 4 | 30,000.00 | 20,000.00 | - | 10,000.00 | 3500 | 6,500.00 | 0.683 | 4439.587 | 4,439.59 |
| NET FLOWS | 74,741.65 | ||||||||
| CASH FLOW | WHEN TAX | RATE IS | 20% | ||||||
| YEAR | INFLOW-REVENUE | OUTFLOW-OPERATIONG COST | DEPRECIATION | NET FLOWS BEFORE TAX | TAX @ 20% | NET FLOWS AFTER TAX | DISCOUNT FACTOR @10% | DISCOUNTED CASH FLOWS | DISCOUNTED CASH FLOWS AFTER DEPRECIATION IE CFAT |
| 1 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1000 | 4,000.00 | 0.909 | 3636.364 | 18,636.36 |
| 2 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1000 | 4,000.00 | 0.826 | 3305.785 | 18,305.79 |
| 3 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1000 | 4,000.00 | 0.751 | 3005.259 | 18,005.26 |
| 4 | 40,000.00 | 20,000.00 | 15,000.00 | 5,000.00 | 1000 | 4,000.00 | 0.683 | 2732.054 | 17,732.05 |
| TERMINAL FLOWS AT YEAR 4 | 30,000.00 | 20,000.00 | - | 10,000.00 | 2000 | 8,000.00 | 0.683 | 5464.108 | 5,464.11 |
| NET FLOWS | 78,143.57 | ||||||||
| SAVINGS DUE TO 15% TAX CHANGE IS | 3,401.92 | ||||||||
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