In: Finance
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.
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 |