Question

your firm is evaluting a new capital project. the firm spent 45000 on a market study anf 30,000 on consulting three months ago. if the firm approves the project, it will spend 900,000 on new machienry 80,000on installation and 10,000 on shipping. the machien will depreciated via simplified straight line deprecation over its 18 year life. the excepected increase from this new project is 800,000 a year and the expected incremental expenses are 300,000 ayear. in order to start this new project the company will invest 100,000 in working capital. the marginal tax rate is 34%. what is the annual net cash flow per year from this project ???

Answer 1

1. annual net cash flow of year 0 (initial investment) = (1,090,000) cash outflow

Initial investment =cost of machine + increase in working capital

• cost of machine= purchase cost + installation cost + shipping cost

= 900,000 + 80,000 + 10,000

=990,000

• Increase in Working capital = 100,000
• Initial investment = 990,000 + 100,000

=1,090,000

2. operating cash flow (year 1 to 17) = 348,700 cash inflow

• Depreciation = 990000 /18 years

= 55,000 per year

• Depreciation tax-shield = depreciation * tax rate

=55,000 * .34

= 18,700

Incremental net income calculation

Incremental revenue	800,000
Incremental expense	300,000
Operating income	500,000
Tax (34%)	170,000
Net income	330,000

• operating cash flow= incremental Net income + depreciation tax shield

= 330,000 + 18,700

= 348,700

3. Terminal cash flows (year 18) =448,700 cash inflow

• Terminal cash flow = operating cash flow of the year + release of working capital

= 348,700 + 100,000

=448,700 cash inflow