Question

Ausel’s is considering a ten-year project that will require $850,000 for new fixed assets that will be depreciated straight-line to a zero book value over the ten years. At the end of the project, the fixed assets can be sold for 15 percent of their original cost. The project is expected to increase the annual sales of $928,000 and costs of $721,000. The tax rate is 35 percent and the required rate of return is 14.6 percent. What is the operating cash flow for this project?

		$164,300
		$122,000
		$219,550
		$175,000

Answer 1

Operting Cash Flows of the Project

(A) Annual Sales = $928,000

(B) Annual Costs = $721,000

(C) Profit Before Depreciation(A-B) = $207,000

(D) Depreciation    = $850,000/10

= $85,000

(E) Profit Before Taxes (C-D)    = $122,000

(F) Tax @ 35% (E*35%) = $42,700

(G) Profit After Taxes (E-F) = $79,300

(H) Depreciation (Non Cash Expense) = $85,000

(I) Operting Cash Flows(G+H) = $164,300

Inorder to consider tha tax savings due to depreciation it has to be deducted while calculating profit for taxation and add back to the profit after tax for actual cash flows to the entity.