Question

A firm is evaluating a new capital project. The firm spent $45,000 on a market study and $30,000 on consulting three months ago. If the firm approves the project, it will spend $800,000 on new machinery, $60,000 on installation, and $10,000 on shipping. The machine will be depreciated via simplified straight-line depreciation over its 12-year life. The expected sales increase from this new project is $500,000 a year, and the expected incremental expenses are $200,000 a year. In order to start this new project, the company will invest $100,000 in working capital. The marginal tax rate is 40%. What is the annual net cash flow per year from this project?

Answer 1

ANS,

HERE,total Expenses is 200000

now first we calculate Cost of machinery and Cost of machinery is = 800000 + 60000 + 10000

                                                                                                  = 870000

and Sales Depreciation = (870000-0)/12

                                   = 72500

so now Profit before tax is = 500000 - 200000-72500

                                      = 227500

and tax at 40% is = 91000

then, Profit after tax is = 227500- 91000

                                 = 136500

hence, Annaul net cash flow = 136500 + 72500

                                              = 209000

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