Question

4. A large corporation subjected to 21% marginal tax is investing 200,000 in a new income producing asset that is depreciated on a MACRS 5 year schedule. The asset was paid for completely when purchased in the first quarter of the first year of operation but for analysis purposes the cash flow of purchase is in period 0. The expected revenue and costs by year are given below. When retired, the asset will have no value.

Year	1	2	3	4	5	6
Direct Revenue	90,000	190,000	210,000	180,000	130,000	80,000
Direct and Allocated Cost	35,000	85,000	90,000	85,000	65,000	35,000

Prepare a net cash flow statement / exhibit for all 6 years of the new asset.

a. What is the net cash flow in year 1?      

b. What is the net cash flow in year 6?       

c. What is the PW of the net cash flow applying an interest rate of 12.0%? Place the purchase at year 0 with all other cash flows at the end of the respective year.   

Answer 1

a: Net Cash flow in year 1 = $51850

b: Net Cash flow in year 6 =

37969.20

c: NPV =

98242.43

WORKINGS

The Operating cash flows are as below:

OCF		MACRS 5 year
Year	Revenue-Cost	Depreciation	EBIT	Tax	PAT	OCF
1	55000	40000	15000	3150	11850	51850
2	105000	64000	41000	8610	32390	96390
3	120000	38400	81600	17136	64464	102864
4	95000	23040	71960	15112	56848.4	79888.4
5	65000	23040	41960	8811.6	33148.4	56188.4
6	45000	11520	33480	7030.8	26449.2	37969.2

The net cash flows are

Year	Initial cash flow	OCF	Net cash flows
0	-200000		-200000.00
1		$51,850.00	51850.00
2		$96,390.00	96390.00
3		$102,864.00	102864.00
4		$79,888.40	79888.40
5		$56,188.40	56188.40
6		$37,969.20	37969.20