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In: Finance

We’re contemplating a new automatic surveillance system to replace our current contract security system. It will...

We’re contemplating a new automatic surveillance system to replace our current contract security system. It will cost $400,000 to get the new system. The cost will be depreciated straight-line to zero over the system’s five-yearexpected life. The system is expected to be worth $50,000 at the end of five years. We think the new system will save us $105,000, before taxes, per year in contract security costs.

The tax rate is 34 percent. The required return is 12 percent. Create a projected cash flow model. What is the Operating Cash Flow for year 5?

Solutions

Expert Solution

Note 1: Computation of annual depreciation
Cost of machine 400,000
usefull life                                                 5
Annual depreciation=400000/5                                        80,000
Computation of projected cash flow model
year 0 1 2 3 4 5
Initial investment           (400,000)
Operating cash flow
Saving in cost                                      105,000           105,000           105,000           105,000               105,000
depreciation                                   80,000.00        80,000.00        80,000.00        80,000.00            80,000.00
Profit before tax                                   25,000.00        25,000.00        25,000.00        25,000.00            25,000.00
Tax @ 34%                                     8,500.00          8,500.00          8,500.00          8,500.00              8,500.00
Net income                                   16,500.00        16,500.00        16,500.00        16,500.00            16,500.00
Operating cash flow                                   96,500.00        96,500.00        96,500.00        96,500.00            96,500.00
Post tax salvage value 33000
50,000*(1-34%)
Net cash flow      (400,000.00)                                   96,500.00        96,500.00        96,500.00        96,500.00            96,500.00
What is the Operating Cash Flow for year 5 =        96,500.00

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