Question

The subject is project management

Consider Cement Project with the following information,

The initial investment outlay on the project is birr 100 million which is consists of 80 million plant and machinery and the remaining 20million is on working capital.

The entire outlay will be made at the beginning of the project

The project will be financed with 50 million of equity

capital and the reaming 50 million of debt financing

 The life of the project is expected to be 5 years.

 At the end of the 5th years a fixed asset will fetch a net salvage value of birr 30 million where as working capital liquidated at its book value

 The project is expected to increase the revenue of the firm by 120 m per year.

 The increase in cost on account of the project is expected to be 80 m per year (this includes all costs items other than depreciation and tax).

 Plant and machinery will be depreciated at the rate of 25% per year as shown below

First year Second year Third year Fourth birr Fifth year

20m 15m 11.25m 8.44m 6.33m

 If the effective tax percent will be 30% and interest rate is 10% , given the above information calculate the yearly cash flow of the

project

Answer 1

Solution:

Cash outflow at year 0 = Initial investment + working capital

Cash outflow at year 0 = 80 million + 20 million = -100 million

Operating cash inflow from year 1 through year 5 =

( Revenue - costs - depreciation)( 1 - tax) + depreciation

1 st year:

Operating cash flow for year 1 = ( 120 - 80 - 20)(1 - 0.30) + 20

  Operating cash flow for year 1 = 34 million

2 nd year:

Operating cash flow for year 2 = ( 120 - 80 - 15)(1 - 0.30) + 15

Operating cash flow for year 2 = 32.5 million

3 rd year:

Operating cash flow for year 3 = ( 120 - 80 - 11.25)(1 - 0.30) + 11.25

Operating cash flow for year 3 = 31.375 million

4 th year:

Operating cash flow for year 4 = ( 120 - 80 - 8.44)(1 - 0.30) + 8.44

Operating cash flow for year 4 = 30.532 million

5 th year:

Operating cash flow for year 5 = ( 120 - 80 - 6.33)(1 - 0.30) + 6.33

  Operating cash flow for year 5 = 29.899 million

Book value = 80 - 20 - 15 - 11.25 - 8.44 - 6.33 = 18.98

Non operating cash flow for year 5 =

Salvage value + recovery of working capital - tax( salvage value - book value)

Non operating cash flow for year 5 = 30 + 20 -0.30(30 - 18.98)

Non operating cash flow for year 5 = 30 + 20 - 3.306

Non operating cash flow for year 5 = 46.694