Question

Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $177,000 per year. Direct production costs are $59,000, and the fixed costs of maintaining the lawn mower factory are $24,500 a year. The factory originally cost $1.18 million and is being depreciated for tax purposes over 20 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 40%.

Answer 1

REVENUES ARE = $1,77,000

DIRECT PRODUCTION COSTS = $59,000

FIXED COSTS = $24,500

GROSS PROFIT = $93,500

DEPRECIATION = $59,000

EBIT = $34,500

THE CASH FLOW FROM OPERATIONS = EBIT (1 - TAX RATE ) + DEPRECIATION

= 20,700+ 59,000

= $79,700

USING EBITDA WE GET = (1,77,000 - 59,000 -24,500 )(0.6) + 59,000*0.4

=$56,100 + 23,600

=$79,700

WHERE, 59,000*0.4 IS THE DEPRECIATION TAX SHIELD.

NOTE : THE AMOUNT OF DEPRECIATION IS CALCULATED AS = $1,18,0000/20 = $59,000

SO THE CASH FLOW FROM OPERATIONS IS EQUAL TO $79,700