Question

Webb inc. is planning on starting a new product line which is expected to have a two year life. The project will require an initial investment of $100,000. From the project, the incremental revenue and the incremental expenses ( not including depreciation) will be $150,000 and $50,000, respectively. The government, in order to promote investment in this area of technology,will allow the investment to be written off in the two years as depreciation according to the following schedule: 60% in the first year (as year 1 expense) and 40% in year 2 ( as year 2 expense). Webb inc. pays 30% tax, and it’s cost of capital is 20%. The equipment is not expected to have any resale value at the end of the project.

what is the operating cash flow for year 1 and 2 as well as the NPV for the project

Answer 1

Initial Investment	100000
Yearly Revenue	150000
Yearly Expenses	50000
1st year Depreciation(100000*60%)	60000
2nd year Depreciation(100000*40%)	40000
Tax	30%
Cost of capital	20%

Year	1	2
Revenue	150000	150000
Expenses	50000	50000
Depreciation	60000	40000
Earnings before Tax	40000	60000
Tax @ 30%	12000	18000
Net Income	28000	42000
Depreciation	60000	40000
Operating Cash Flow	88000	82000
Discount Rate @20%	0.893	0.744
NPV
year 0	-100000
Year 1	78571.43
Year2	61011.9
NPV	39583.33

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