Question

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.

Answer #1

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 |

Company ABC is considering a new 5-year investment into new
production equipment that requires initial investment € 4 million.
The project is expected to generate € 1.4 million in annual sales,
with costs of € 0.5 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 ABC uses the straight-line depreciation over the 5 years of
project life...

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value assumed to be zero at the end of the project).
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