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Your cloud computing company is considering an investment into a new set of hardware. A $50...

Your cloud computing company is considering an investment into a new set of hardware. A $50 million dollar investment in a new plant would be depreciated straight-line over 10 years. You could then produce revenues of $30 million per year for 10 years, your variable costs would be $23 million per year, you face a 21% tax rate, and your discount rate is 10%. What is your annual cash flow?

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Expert Solution

Particulars $ in millions
Revenue per year                  30.00
Less: Variable Costs                  23.00
Earnings before depreciation and tax                     7.00
Less: Depreciation (Cost of asset / Useful life)                     5.00
Earnings before tax                     2.00
Tax at 21%                     0.42
Earnings after tax                     1.58
Add back depreciation                     5.00
Cash flow from operations or annual cash flow                     6.58

Therefore, annual cash flow is $6.58 million.

We add back depreciation because it is a non cash expense.

Excel formulas:

jeff jeffy answered 1 year ago
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