Question

you are examining the desirability of selling widgets. To conduct the analysis, you’ve estimated that you will sell 1 million units and will sell the units for $99 each for the next five years. The variable costs for producing this product is estimated to be $23 per unit. Fixed costs will be $5 million per year. The equipment used to produce the widgets will cost $30 million and will be depreciated using the MACRS depreciation schedule for a five-year useful life. In year 5, the equipment will be sold for 30% of its original cost. The tax rate is 21%. Construct a proforma income statement to find the net income and operating cash flow for each of the five years.

Answer 1

Proforma Income Statement
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Annual Sales (A = 1 million * $99)	99,000,000	99,000,000	99,000,000	99,000,000	99,000,000
Variable Costs (B = 1 million * $23)	23,000,000	23,000,000	23,000,000	23,000,000	23,000,000
Fixed Costs (C )	5,000,000	5,000,000	5,000,000	5,000,000	5,000,000
Depreciation (D) $30 million * 20%, 32%, 19.2%, 11.52%, 11.52%	6,000,000	9,600,000	5,760,000	3,456,000	3,456,000
Profit Before Tax (E = A-B-C-D)	65,000,000	61,400,000	65,240,000	67,544,000	67,544,000
Tax @21% (F = E*21%)	13,650,000	12,894,000	13,700,400	14,184,240	14,184,240
Profit After Tax (G = E-F)	51,350,000	48,506,000	51,539,600	53,359,760	53,359,760
Add back Depreciation (H = D)	6,000,000	9,600,000	5,760,000	3,456,000	3,456,000
Net Operating Cash Flows (I = G+H)	57,350,000	58,106,000	57,299,600	56,815,760	56,815,760
Operating Cash Flow for Year 1 is $57,350,000
Operating Cash Flow for Year 2 is $58,106,000
Operating Cash Flow for Year 3 is $57,299,600
Operating Cash Flow for Year 4 is $56,815,760
Operating Cash Flow for Year 5 is $56,815,760