Question

Swindler Ltd has completed a feasibility study costing $22,378 to determine if there is any benefit in purchasing a new asset. The machine will cost $331,976 and an additional $11,128 will need to be spent to have the machine in operational state. Before the machine can be used staff must be trained at a further cost of $8,855.

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 $22,297 and additional stock of $71,498 will be needed. Wages will change from $85,000 to $53,864 and Fixed Costs will remain at $37,687.

The new machine is expected to produce sales of $1,549,364 in the first year and will grow by 11% each year of the project. Material costs will be 29% 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.  

Answer 1

		NET CASH FLOW IN YEAR 1
		Calculation of depreciation expense
	A	Cost of machine	331,976
	B	Additional expenses	11,128
	C=A+B	Depreciable asset	343,104
	D	Useful life in years	5
	E=C/D	Annual Depreciable expenses	68,621
			Year 1
	a	Sales	1,549,364
	b=a*29%	Material Cost	(449,316)
	c	Savings in wages	31,136	(85000-53864)
	d	Depreciation expenses	(68,621)
	e=a+b+c+d	Before tax profit	1,062,564
		Assuming Tax Rate =30%
	f=e*30%	Tax Expense	(318,769)
	g=e+f	Operating Income after tax	743,795
	h	Add:Depreciation(Non cash expenses)	68,621
	i=g+h	NET CASH FLOW IN YEAR 1	812,415