11. Champlain Transportation Inc. is considering a five-year project that requires an initial capital investment of...

11. Champlain Transportation Inc. is considering a five-year project that requires an initial capital investment of $1 million. The project is expected to generate operating revenue of $500,000 per year, and the associated operating expenses are estimated at $250,000 per year. The capital asset belongs to asset class 9, which has a CCA rate of 30 percent. The firm’s tax rate is 35 percent. What is the after-tax cash flow for year 1? a. $110,000 b. $215,000 c. $302,500 d. $312,500

Solutions

Expert Solution

Initial Investment = $ 1,000,000

Revenue = $ 500,000

Operating Exp. = $ 250,000

Capital Asset belongs to asset class 9, which has a CCA rate = 30%

Beginning UCC = $ 1000,000*50%

= $ 500,000

CCA depreciation = $500,000*30% = $150,000

Calculating the after tax cash flow for year 1:-

Particular	Amount in $
Revenue	500,000
Less: Operating Exp	(250,000)
Less: CCA dep.	(150,000)
Earnings before Tax	100,000
Less: Tax @ 35%	(35,000)
Net Income	65,000
Add: CCA Depreciation	150,000
After tax cash flow	215,000

So. After tax cash flow is $ 215,000

Hence, Option B

If you need any clarification, you can ask in comments.

If you like my answer, then please up-vote as it will be motivating

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.7 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $465,000. The project is expected to generate $3.3 million in annual sales, with annual expenses of $980,000. The project will require an initial investment of $515,000 in NWC that will be returned at the end of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.1 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $425,000. The project is expected to generate $2.9 million in annual sales, with annual expenses of $940,000. The project will require an initial investment of $475,000 in NWC that will be returned at the end of...

Down Under Boomerang, Inc., is considering a new 7-year project that requires an initial investment in...

Down Under Boomerang, Inc., is considering a new 7-year project that requires an initial investment in a fixed asset of $2.376 million. The fixed asset will be depreciated straight-line to zero over its 7-year life. After Year 0, the project is expected to generate $2,112,000 in annual sales per year, with operating costs of $844,800 per year. The tax rate is 34 percent and the appropriate discount rate is 9 percent. The project requires an increase in net working capital...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.5 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $445,000. The project is expected to generate $3.1 million in annual sales, with annual expenses of $960,000. The project will require an initial investment of $495,000 in NWC that will be returned at the end of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.7 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $385,000. The project is expected to generate $2.5 million in annual sales, with annual expenses of $900,000. The project will require an initial investment of $435,000 in NWC that will be returned at the end of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.65 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $460,000. The project is expected to generate $3.25 million in annual sales, with annual expenses of $975,000. The project will require an initial investment of $510,000 in NWC that will be returned at the end of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.65 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $395,000. The project is expected to generate $2.45 million in annual sales, with annual expenses of $950,000. The project will require an initial investment of $420,000 in NWC that will be returned at the end of...

Frieda Inc. is considering a capital expansion project. The initial investment of undertaking this project is...

Frieda Inc. is considering a capital expansion project. The initial investment of undertaking this project is $105,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $22,500, $25,800, $33,000, $45,936 and $58,500 respectively. Frieda has weighted average cost of capital equal to 24%. What is the NPV of undertaking this expansion project? That is, what is the...

Five Stars Inc., is considering a new three-year expansion project that requires an initial fixed asset...

Five Stars Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of 3.9 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,650,000 in annual sales, with costs of $840,000. Suppose the project requires an initial investment in net working capital of $300,000 and the net working capital will be fully recovered at the end...

Dr. Chan is considering a four year project. The project requires an initial investment of $10,000,000...

Dr. Chan is considering a four year project. The project requires an initial investment of $10,000,000 to buy new equipment. The equipment will be depreciated straight line to zero over the project’s life. The company believes it can generate $5,000,000 in pretax revenues in year 1. Revenues will increase at 20% per year. Total pretax operating cost would be 40% of the pretax revenues. Net working capital will be 20% of the pretax revenue for the year. Net working capital...

Subjects