Question

.Use This information for the next 3 questions: You buy a 2 million dollar building for an 8 year project. You can depreciate it over 20 years. In 8 years, you sell the building for 1.6 million dollars. Over the 8 year project, you project needing net working capital as follows Years 0, 1, 2, you need 100,000 of capital Years 3, 4, 5 you need 140,000 of capital Years 6, 7, 8 you need 175,000 of capital Because you took this project, you foresee sales increasing by 540,000. Cogs will increase by 200,000. You’ll pay 50,000 of interest on the debt for the building. Your tax rate is 25%

4) Find the cash flow from selling the machine in year 8

5) Find the change in net working capital for year 3

6) find the operating cash flow each year of the project.

Answer 1

4
Depreciation per year	2000000/20
Depreciation per year	100000
Book value of building at end of year 8	Cost - Accumulated depreciation
Book value of building at end of year 8	2000000-(100000*8)
Book value of building at end of year 8	2000000-800000
Book value of building at end of year 8	1200000
Gain (Loss) on sale of building	Sale proceeds - Book value
Gain (Loss) on sale of building	1600000-1200000
Gain (Loss) on sale of building	400000
Tax on gain on sale of building	100000	400000*25%
After tax cash flow from selling building	$1,500,000	1600000-100000
5
Calculation of change in net working capital for year 3
Year	0	1	2	3
Working capital required	$100,000	$100,000	$100,000	$140,000
Change in working capital	$0	$0	$0	-$40,000
Thus, in year 3 there would be increase in working capital by $40,000
6
Calculation of operating cash flow
Operating cash flow	Net income+Depreciation
Year
Increase in sales	$540,000
Less: Increase in COGS	$200,000
Less: Depreciation	$100,000
Less: Interest on debt	$50,000
Income before taxes	$190,000
Taxes @ 25%	$47,500
Net income	$142,500
Add: Depreciation	$100,000
Operating cash flow	$242,500
Thus, operating cash flow each year is $242,500