Question
In: Finance
A new project has an intial cost of $480,000 with an expected life of 8 years.
A new project has an intial cost of $480,000 with an expected life of 8 years. The project is expected to have earnings before depreciation and taxes of $125,000 per year. If the projected is being depreciated over a 3-year term and the firm’s tax rate is 40%, calculate the cashflows of the project over its estimated life.
Solutions
Expert Solution
Dep = Cost / Depreciable life
= $ 480000 / 3
= $ 160000
Cash flow = PAT + Dep
| Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 |
| Initial Cost | $(480,000.00) | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - |
| EBDIT | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | |
| Dep | $ 160,000.00 | $ 160,000.00 | $ 160,000.00 | $ - | $ - | $ - | $ - | $ - | |
| PBT | $ (35,000.00) | $ (35,000.00) | $ (35,000.00) | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | $ 125,000.00 | |
| Tax @40% | $ (14,000.00) | $ (14,000.00) | $ (14,000.00) | $ 50,000.00 | $ 50,000.00 | $ 50,000.00 | $ 50,000.00 | $ 50,000.00 | |
| PAT | $ (21,000.00) | $ (21,000.00) | $ (21,000.00) | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | |
| Cash Flow | $ 139,000.00 | $ 139,000.00 | $ 139,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | |
| Total Cah flow | $(480,000.00) | $ 139,000.00 | $ 139,000.00 | $ 139,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 | $ 75,000.00 |
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