Company ABC is considering a new 5-year investment into new production equipment that requires initial investment € 5 million. The project is expected to generate € 1.4 million in annual sales, with costs of € 0.6 million per year for next 5 years. ABC uses the straight-line depreciation over the 5 years of project life (book value assumed to be zero at the end of the project).
If the tax rate is 35%. What is the annual operating cash flow
of the project? Express your answer in millions of euros.
| Equip ment cost = | $5,000,000 | |
| intellation cost = | $0 | |
| Cost capitalised = | 5,000,000.00 | |
| Life of machine(years) = | 5 | |
| Depreciation = | Cost / life in years | |
| 1,000,000.00 | ||
| Year 1 | ||
| Sales | 1,400,000.00 | |
| Less | Cost | 600,000.00 |
| Profit | 800,000.00 | |
| Less | Depreciation | 1,000,000.00 |
| Net profit(LOSS) | (200,000.00) | |
| Less | Tax @ 35% | (70,000.00) |
| Profit after tax | (130,000.00) | |
| Add | Depreciation | 1,000,000.00 |
| CASh Inflow ( yearly) | 870,000.00 |
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