Question

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

Answer 1

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

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

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