Question

Given the following, calculate the cash flows for the project.

• Initial investment $365,000
• Expected life is 5 years
• First Year Revenues: 245,000
• First Year Expenses: $70,000
• Growth for revenue and expenses: 3 percent per year
• Straight Line Depreciation over 5 years
• Salvage Value: $45,000
• One-time net working capital investment of $10,000 required at the start of the project
• This investment is recovered at the end of the project
• The tax rate is 34 percent

Answer the following:

What are the cash flows for each year?

Answer 1

Computation of Cash flows for every year.

S.No	Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
A	Revenue	$245,000	$252,350.00	$259,920.50	$267,718.12	$275,749.66
	( Calculation)	$245,000	$ 245000*1.03	$ 252350*1.03	$ 259920.50*1.03	$ 267718.12*1.03
B	Expenses	$70,000	$72,100.00	$74,263.00	$76,490.89	$78,785.62
	( Calculation)	$70,000	$ 70000*1.03	$ 72100*1.03	$ 74263*1.03	$ 76490.89*1.03
C	Profit before Dep( A-B)	$175,000	$180,250	$185,658	$191,227	$196,964
D	Less: Depreciation	$64,000	$64,000	$64,000	$64,000	$64,000
E	Profit before tax	$111,000	$116,250	$121,658	$127,227	$132,964
F	Taxes @ 34% on E	$37,740.00	$39,525.00	$41,363.55	$43,257.26	$45,207.77
G	Profit after Tax ( E-F)	$73,260.00	$76,725.00	$80,293.95	$83,969.97	$87,756.27
H	Add: Depreciation	$64,000	$64,000	$64,000	$64,000	$64,000
I	Annual Cash flow( G+H)	$137,260.00	$140,725.00	$144,293.95	$147,969.97	$151,756.27

Computation of Depreciation per annum

Depreciation under straight line method = (Cost - Salvage value)/Expected life

=   ($ 365000-$ 45000)/5

= $ 64000.

On salvage value, there is no tax because the entiire cost of the project is not depreciated.Out of $ 365000, only $ 320000 is depreciated.

Hence there is no tax treatment on salvage value.

Working Capital recovered at the end of the project is $ 10000.

Additional cash flows accruing in the 5th year is $ 45000+$ 10000= $ 55000

Total Cash flow in the 5th year is $ 151756.27+$ 55000= $ 206756.27

Year	Cash flow
0	$375000( $ 365000+$ 10000)
1	$137,260
2	$140,725.00
3	$144,293.95
4	$147,969.97
5	$206,756.27

If you have any doubts,please post it in a comment.

Thank you.Please rate it.