Question

	Year 1	Year 2	Year 3	Year 4	Year 5
Revenues	$16,000	$20,000	$38,000	$48,000	$35,000
Less: Cash expenses	($8,000)	($5,000)	($14,000)	($19,000)	($19,000)
Less Depreciation	($3,000)	($4,000)	($3,000)	($3,000)	($3,000)
Income before tax	$5,000	$11,000	$21,000	$26,000	$13,000
Less: Tax @ 40%	($2,000)	($4,400)	($8,400)	($10,400)	($5,200)
Income after tax	$3,000	$6,600	$12,600	$15,600	$7,800
Add: Depreciation	$3,000	$4,000	$3,000	$3,000	$3,000
After tax cash flows	$6,000	$10,600	$15,600	$18,600	$10,800

Right before opening the Lansing store discussed in problem 1, you have discovered that Fort Wayne forgot to budget 10% of revenues as a cash balance, 20% of cash expenses as an inventory balance, and 10% of cash expenses as an accounts payable balance. All of these balances would be needed at the beginning of each year and are estimated from the year-end annual estimates of revenues and cash expenses given earlier. Recalculate the cash flows for the Lansing store investment.

Answer 1

Year	0	1	2	3	4	5
Revenue	$               -	$        16,000	$        20,000	$         38,000	$         48,000	$         35,000
Less : Cash Exp.	$               -	$        (8,000)	$        (5,000)	$       (14,000)	$       (19,000)	$       (19,000)
Less : Depreciation	$               -	$        (3,000)	$        (4,000)	$         (3,000)	$         (3,000)	$         (3,000)
Income Before Tax	$               -	$          5,000	$        11,000	$         21,000	$         26,000	$         13,000
Less : Tax @40%	$               -	$        (2,000)	$        (4,400)	$         (8,400)	$       (10,400)	$         (5,200)
Income after Tax	$               -	$          3,000	$          6,600	$         12,600	$         15,600	$            7,800
Add : Depreciation	$               -	$          3,000	$          4,000	$            3,000	$            3,000	$            3,000
Less : Change in Working Capital	$        2,400	$          2,500	$          5,200	$            6,700	$            5,400	$                   -
After tax cash flow	$      (2,400)	$          3,500	$          5,400	$            8,900	$         13,200	$         10,800
Calculation of Change in Working Capital
Year	0	1	2	3	4	5
Revenue	$               -	$        16,000	$        20,000	$         38,000	$         48,000	$         35,000
Cash Exp.	$               -	$          8,000	$          5,000	$         14,000	$         19,000	$         19,000
Increase in Current Asset
(Cash Balance) (10% of sales)	$        1,600	$          2,000	$          3,800	$            4,800	$            3,500	$                   -
(Inventory Bal.)(20% of Cash Exp.)	$        1,600	$          1,000	$          2,800	$            3,800	$            3,800	$                   -
Increase in Current Liability	$         (800)	$            (500)	$        (1,400)	$         (1,900)	$         (1,900)	$                   -
(Account Payable)(10% of Cash Exp.)
Change in Working Capital	$        2,400	$          2,500	$          5,200	$            6,700	$            5,400	$                   -