A new project has an intial cost of $350,000 with an expected life of 7 years....

A new project has an intial cost of $350,000 with an expected life of 7 years. The project is expected to have earnings before depreciation and taxes of $125,000 per year. If the projected is being depreciated over a 4-year term and the firm’s tax rate is 40%, calculate the cashflows of the project over its estimated life.

Expert Solution

Tax rate		40%
Calculation of annual depreciation

Depreciation		Year-1-4
Cost		$ 350,000
Installation		$ -
Depreciable cost		$ 350,000
Depreciation rate		1/4
Depreciation rate		25%
Annual depreciation (1/4=25%)		$ 87,500


Calculation of annual operating cash flow
		Year-1-4	Year-5-7
Earning before depreciation and tax		$ 125,000	$ 125,000
Less: Depreciation		$ (87,500)	$ -
Profit before tax (PBT)		$ 37,500	$ 125,000
Tax@40%	PBT*Tax rate	$ (15,000)	$ (50,000)
Profit After Tax (PAT)	PBT - Tax	$ 22,500	$ 75,000
Add Depreciation	PAT + Dep	$ 87,500	$ -
Cash Profit after-tax		$ 110,000	$ 75,000

Calculation of cash flows over the project life

Year		Capital		Operating cash	Annual Cash flow
0		$ (350,000)			$ (350,000)
1				$ 110,000	$ 110,000
2				$ 110,000	$ 110,000
3				$ 110,000	$ 110,000
4				$ 110,000	$ 110,000
5				$ 75,000	$ 75,000
6				$ 75,000	$ 75,000
7				$ 75,000	$ 75,000

jeff jeffy answered 2 years ago

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