Question

Laurel's Lawn Care, Ltd., has a new mower line that can generate revenues of $12000 per year. Direct production cost is $40000 and the fixed cost of maintaining the lawn mower factory are $15000 a year. The factory originally cost $1 million and is included in an asset class with a CCA rate of 5%. Calculate the operating cash flows of the project for the next 6 years if the firm's tax bracket is 35%

Do the calculation assuming

a. the half-year rule

b. The accelerated investment incentive

Answer 1

Sales = $ 120000

Direct production cost=$40000

Fixed cost= $15000

In the first year only half one can claim half of CCA i. e 2.5%

First year CCA deduction= $1000000× 2.5%= $25000

In the second year deduction would be based on depreciated value of $975000($1000000-$25000). So the CCA would be $975000×5%= $48750.

In the third year deduction would be based on depreciated value of $926250($97500-$48750). So the CCA would be $926250×5%= $46312.

In the forth year deduction would be based on depreciated value of $879938($926250-$46312). So the CCA would be $879938×5%= $43996.

In the fifth year deduction would be based on depreciated value of $835942($879938-$43996). So the CCA would be $835942×5%= $41797.

In the sixth year deduction would be based on depreciated value of $794145($835942-$41797). So the CCA would be $794145×5%= $39707.

Depreciation= $39707

EBIT= $120000-($40000+$15000+$39707)=$25293

Tax= 35% =$25293×35%= $8852

Net Income= $25293-$8852= $16441.

Depreciation= $39707.

Operating Cash flow= $16441+$39707= $56148.