Question

Brady, a U.S.-based firm, is considering a three-year project in China.

        The following information is available about the project:

• The project is for 3
  • Initial capital expenditure is CNY180,000.
  • You will depreciate this cost over 3 years using SL to zero.
  • Pre-tax salvage value at year 3 is expected to be CNY60,000.
• Brady expects to sell 40,000 units/year at a price of CNY4/unit, variable cost = CNY1/unit.
  • Fixed costs are estimated to be CNY5,000/year.
  • Net working capital is estimated to be 25% of the next year’s sales.
• The project WACC_CNY is 12%. The tax rate in China is 15%.
• What is the total cash flow in year 3?

Answer 1

Given Information
Initial capital Exp	180000
Total Unit sold	40000
Sale Price	4
Variable cost	1

Calculation of Profit
TOTAL SALE	160000
VARIABLE COST	40000
CONTRIBUTION	120000
FIXED COST	5000
DEPRECIATION	60000
PROFIT BEFORE TAX	55000
TAX @ 15%	8250
PROFIT AFTER TAX	46750

Calculation of Cash Flow In Years 3
	PROFIT AFTER TAX	46750
Add	DEPRECIATION	60000
Add	Recovery Of Working Capital	40000
		(=160000x25%)
Add	Post Tax Salvage Value
	Salvage Value	60000
	Tax @ 15%	9000	51000
	Total Cash flow Year 3	197750