Question

If Company XYZ plans to launch a new production line, and in year 1, will have sales revenue       

             $10,000,000, operating cost is 70% of the sales revenue, depreciation is $2,000,000, and tax rate    

              is 40%, what is the Company’s projected cash flow in year 1?

                                                    

       b. If the Company’s launch of the new production line will cause the exit of an existing production line     

         that can generate $1,000,000 operating income before tax, how much will be the Company’s  

        projected cash flow in year 1, if we take this opportunity cost or cannibalization into the consideration?            

c. If the tax rate fell to 30%, what will be the project’s cash flow?

Answer 1

a]	Sales	$    10,000,000
	-Operating cost [70% of sales]	$      7,000,000
	-Depreciation	$      2,000,000
	=Incremental NOI	$      1,000,000
	-Tax at 40%	$ 400,000
	=Incremental NOPAT	$ 600,000
	+Depreciation	$      2,000,000
	=Projected cash flow in year 1 [OCF]	$      2,600,000
b]	Sales	$    10,000,000
	-Operating cost [70% of sales]	$      7,000,000
	-Depreciation	$      2,000,000
	-Cannibalization	$      1,000,000
	=Incremental NOI	$                     -
	-Tax at 40%	$                     -
	=Incremental NOPAT	$                     -
	+Depreciation	$      2,000,000
	=Projected cash flow in year 1 [OCF]	$      2,000,000
c]	The Project CFs for year 1 after the tax reduction in
	both the cases given above, are shown below:
i]	Sales	$    10,000,000
	-Operating cost [70% of sales]	$      7,000,000
	-Depreciation	$      2,000,000
	=Incremental NOI	$      1,000,000
	-Tax at 30%	$ 300,000
	=Incremental NOPAT	$ 700,000
	+Depreciation	$      2,000,000
	=Projected cash flow in year 1 [OCF]	$      2,700,000
	Sales	$    10,000,000
	-Operating cost [70% of sales]	$      7,000,000
	-Depreciation	$      2,000,000
	-Cannibalization	$      1,000,000
	=Incremental NOI	$                     -
	-Tax at 30%	$                     -
	=Incremental NOPAT	$                     -
	+Depreciation	$      2,000,000
	=Projected cash flow in year 1 [OCF]	$      2,000,000