Question

Assume the following information relating to an investment opportunity: Initial cost = $20,000,000 (all depreciable) Economic...

Assume the following information relating to an investment opportunity:

  • Initial cost = $20,000,000 (all depreciable)
  • Economic life of project = 4 years
  • Depreciation by the straight-line method
  • Units sold/year = 1,000,000
  • Product price = $25/unit
  • Product variable cost = $15/unit
  • Fixed costs of operations (not including depreciation) = $1,000,000/year
  • Tax rate = 30%
  • Required return = 13%

What is the annual net cash flow for this opportunity?

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Answer #1

Depreciation per year = initial cost Depreciable/useful life

=20000000/4

=5000000

Calcultion of Annual net cash flow:

Sales (1000000*25).................25000000

Less: Var. Cost (1000000*15)...-15000000

Less: fixed cost..........................-1000000

Less: Depreciation....................-5000000

------------------------------------------------------------------

EBIT.........................................4000000

Less: tax@30%.........................-1200000

------------------------------------------------------------------

EAT.............................................2800000

Add: Depreciation.....................5000000

------------------------------------------------------------------

Annual net cash flow................7800000

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So Annual net cash flow for project is 7800000

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