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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.

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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

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