Question

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?

Answer 1

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