HW15-4) What is the operating cash flow for year 3 of project A that Green Forest...

HW15-4)

What is the operating cash flow for year 3 of project A that Green Forest Media should use in its NPV analysis of the project? The tax rate is 25 percent. During year 3, project A is expected to have relevant revenue of 78,000 dollars, relevant variable costs of 24,000 dollars, and relevant depreciation of 18,000 dollars. In addition, Green Forest Media would have one source of fixed costs associated with the project A. Yesterday, Green Forest Media signed a deal with Jabari Advertising to develop a marketing campaign. The terms of the deal require Green Forest Media to pay Jabari Advertising either 20,000 dollars in 3 years if project A is pursued or 24,000 dollars in 3 years if project A is not pursued. Finally, the equipment purchased for the project would be sold in 3 years for an expected after-tax cash flow of 6,000 dollars.

Solutions

Expert Solution

NPV is the met present value of the project. It is the sifference between present value of inflows and present value of outflows. when the difference is positive, the project is supposed to be accepted.

The operating cash-flow (OCF) which is used in NPV calculation is the earnings after tax and before depriciation as depriciation is not a cash expense but it is used as tax-shield.

OCF will be calculated as below:

Particulars	Amount
Revenue	$78,000
Less: Variable cost	$24,000
Less: Fixed cost (project A is pursued)	$20,000
Less: Depriciation	$18,000
Earnings after depriciation	$16,000
Less: Tax@ 25% on $16,000	$4,000
Earnings after tax	$12,000
Earnings after tax before depriciation:- Add depriciation 12,000+18,000	$30,000

Thus, operating cash flow will be:

Earnings after tax before depriciation + After tax salvage value

Thus, operating cash-flow for NPV calculation will be $36,000

jeff jeffy answered 1 year ago

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