Question

What is the operating cash flow for year 4 of project A that Platinum Water Banking should use in its NPV analysis of the project? The tax rate is 10 percent. During year 4, project A is expected to have relevant revenue of 76,000 dollars, relevant variable costs of 25,000 dollars, and relevant depreciation of 11,000 dollars. In addition, Platinum Water Banking would have one source of fixed costs associated with the project A. Yesterday, Platinum Water Banking signed a deal with Jabari Advertising to develop a marketing campaign. The terms of the deal require Platinum Water Banking to pay Jabari Advertising either 26,000 dollars in 4 years if project A is pursued or 12,000 dollars in 4 years if project A is not pursued. Finally, the equipment purchased for the project would be sold in 4 years for an expected after-tax cash flow of 12,000 dollars.

Answer 1

Dear Student,

The question is asked to calculate the operating cashflow in year 4 which will be considered in NPV calculation of the project.

Operating cash means the net cash flows generated from the operation of the project.

Cashflow from the sale of equipment of the project is non-operating cash flow. It is capital receipt. Though it is considered in the NPV analysis but it is not part of the operating cash flow for the particular year.

Particulars	Amount	Remarks
Revenue	76000
Less: Expenses	(25000)
Less: Depriciation	(11000)
Less: Marketing cost	(14000)	Only incremental cost due to the Project A is Considered i.e. 26000-12000
Profit Before Tax	26000
Less: Tax @ 10%	(2600)
Profit After Tax	23400
Add: Depriciation	11000	Since depriciation is non Cash expenses
Operating cash Flow	34400	Answer

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