Question

Data for Cash Flow Estimation for an Expansion Project
• Cost of new equipment: $200,000
• Life of the project: 5 years
• Depreciation for equipment: Straight-line to zero over five years
• Investment (increase) in net working capital: $30,000
• Annual sales: $220,000
• Annual cash operating expenses: $90,000
• Income tax rate: 40%
• At the end of year five, the company will sell off the equipment for $50,000.
• At the end of year five, the firm will recover the net working capital investment of $30,000.

What is the total initial investment outlay in Year 0?

What is the depreciation amount in Year 1?

What is the operating income BEFORE taxes in Year 1?

What is the operating income AFTER taxes in Year 1?

What is the after-tax operating cash flow in Year 1?

What is the total terminal year after-tax non-operating cash flow?

Answer 1

(a) Calculation of initial investment outlay in Year 0

Cost of equipment $200,000

Investment in net Working capital $30,000

__________

$230,000

So, initial investment outlay in year 0 is $230,000

(b) Depreciation

Depreciation = Cost of asset/No. of years

= 200,000/5 = $40,000

So, depreciation in Year 1 is $40,000.

(c) Operating income

Sales 220,000

less : cost of sales -90,000

Less : depreciation -40,000

________

Operating income before taxes $ 90,000

Operating income before taxes is $90,000

(d)

Operating income before tax $90,000

less : Tax @ 40% -36,000

)________

Operating income after taxes $54,000

So, operating income after taxes is $54,000.

(e)

Operating income after taxes $54,000

Add : depreciation $40,000

(as depreciation is non-cash

expenses.it will be added)

________

Free cash flow in year 1 $94,000

so, free cash flow in year 1 is $94,000

(e)

Working capital recovered $30,000

Selling price of equipment $50,000

(book value is 0. so on whole

$50,000 @40%

tax will be payable)

Less : Tax @ 40% -20,000

________

Terminal cash inflow $60,000

So, terminal cash inflow after tax is$60,000.