Question

Can anyone provide an example operating cash flow for an expansion

Answer 1

Example: Expansion Project

Assume it is 2005.

1. New product: Can sell 20,000/year at $3,000 each

2. Project’s economic life = 4 years, 2006, 2007, 2008, 2009. Operations commence January 2006 and end December 31, 2009.

3. Variable costs: $2,100 per unit. Fixed overhead cost, excluding depreciation = $8 million per year.

4. Idea for product came as by-product from work company already doing. R&D manager authorized expenditure of $500,000 for feasibility study in 2004. Expense incurred in 2004, charged to general corporate R&D and expensed in 2004 for tax purposes.

5. Purchased new building need for production in 2005. Building cost $12 million. Building will be depreciated under MACRS with a 39-year life.

6. Equipment needed for production purchased in 2005. Cost: $8 million, including transportation. Depreciated under MACRS with 5-year class life.

7. Project will require one-time investment in net working capital of $6 million made in 2005. All of this investment will be recovered at end of project.

8. At end of project, building will have market value of $7.5 million and equipment will have market value of $2 million.

9. Assume all cash flows occur at end of year. Tax rate = 40%. Corporate WACC = 12%.

2. calculation of depreciation is shown below (in $1,000)

Building (39-year life) 2006 2007 2008    2009

Book value

beginning of the year) $12,000 $11,844 $11,532 $11,220

Depreciation rate 1.3% 2.6% 2.6% 2.6%

Depreciation expense

(building) 156 312    312 312

Equipment (5-year life) 2006        2007 2008 2009

Book value

(beginning of the year) $8,000 $6,400 $3,840 $2,320

Depreciation rate 20% 32% 19% 12%

Depreciation expense

(building) $1,600 $2,560 $1,520 $960

Operating cash flows =

Revenue

-Expenses (excluding depreciation)

Profits before depreciation and taxes

-depreciation

Net profits before taxes (EBIT)

-taxes

Net profits after taxes (NOPAT)

+depreciation

Operating cash inflows

Calculation of Operating cash flows is given below (in $1,000)

2006 2007 2008 2009

Units sold 20,000 20,000 20,000 20,000

Sales price $3 $3 $3 $3

Sales revenue $60,000   $60,000 $60,000 $60,000

Variable costs 42,000 42,000 42,000 42,000

Fixed operating costs 8,000     8,000 8,000 8,000

Depreciation (building) 156 312 312 312

Depreciation (equipment) 1,600 2,560 1,520 960

EBIT $8,244 $7,128 $8,168 $8,728

Taxes 3,298 2,851 3,267 3,491

NOPAT $4,946 $4,277 $4,901 $5,237

Add back depreciation 1,756 2,872 1,832 1,272

Operating cash flow $6,702 $7,149 $6,733 $6,509