6. Describe how each of the following affect the expected operating cash flow for a proposed...

6. Describe how each of the following affect the expected operating cash flow for a proposed capital budgeting project (be as specific and complete as possible):

The depreciation deduction for the building constructed to house the project.

b. the taxes paid on sale of the equipment at the end of the project.

c. the compensation paid to an existing employee who will be managing the project’s operations.

d. interest payable on debt used to finance the project.

e. uncollectible accounts receivable.

f. the initial cost of land for the project.

g. the variability in the cost of raw materials for the project.

Expert Solution

Describe how each of the following affect the expected operating cash flow for a proposed capital budgeting project (be as specific and complete as possible):

a.The depreciation deduction for the building constructed to house the project: depreciation is first reduced from the operating income to calculate the taxable profit and then added back to the after tax value of profit, due to being of non-cas nature, so higher the depriaciation, lower is the tax and higher is the tax shield also, higher is the CFO

b. the taxes paid on sale of the equipment at the end of the project: In case the equipment is sold at a profit, it results in lowerin gthe CFO due to taxes paid and if the equipment is sold at a loss, it results in tax savings.

c. the compensation paid to an existing employee who will be managing the project’s operations: This is a general expense and it reduces the CFO as it reduces the taxable profit

d. interest payable on debt used to finance the project:This is a general expense and it reduces the CFO as it reduces the taxable profit

e. uncollectible accounts receivable: This leads to bad debts, and it reduces the CFO as it reduces the taxable profit

f. the initial cost of land for the project: This is recorded in the balanceshee and doesnt impact CFO, it is a part of investing activities.

g. the variability in the cost of raw materials for the project: This impacts the cost of goods sold and thus impacts the taxable profit so higher cost leads to lower profits and therefore lower CFO if all purchases are made in cash and even if they are made on credit, it needs to be paid at some point, and in that year it will reduce the CFO.

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