Question

trumptreats a maker of candy that resembles the current president, is considering opening up a kiosk outside the trump tower on 5th avenue. the project will rquire an invesment of 45,000 in eqipment and 20,000 in net working capital to get started. the net working capital will be recovered at the end of the project, and equipment will have no salvage value. the eqipment will be deprciated on a straight line basis over the three year life of the project . incremental revenues will be 75,000 in year one , 80,000 in two and 85,000 in three. incremental expensis will be 50,000 per year in each of the three years. the tax rate is 40%

calculate the intail net investment and the net after tax cash flows of the project for each year.

Answer 1

Calculation of Cash flows
	Year 0	Year 1	Year 2	Year 3
Initial Investment	(45,000)
Investment in Working capital	(20,000)
Incremental Revenues		75,000	80,000	85,000
Costs		50,000	50,000	50,000
Depreciation		15,000	15,000	15,000
Income before tax		10,000	15,000	20,000
Less: Tax		4,000	6,000	8,000
Net Income		6,000	9,000	12,000
Add: Depreciation		15,000	15,000	15,000
Recovery of working capital				20,000
After tax salvage value				-
Cash flow	(65,000)	21,000	24,000	47,000