Question

QUESTION 25

1. A project will generate an additional $2.1 million in sales per year, and additional $1 million in cash operating costs per year. The $14 million project will be depreciated on the MACRS 10-year category schedule from the table. If the tax rate is 40%, calculate the year 3 ΔNOCFt.

   		$1,466,400
   		$8,912,300
   		$1,109,278
   		$1,395,199
   		none of the above

Answer 1

Answer:$1,466,400

The Net operating cash flow after tax can be computed using the formula

Additional Benefits-additional Costs Less Tax depreciation +/- Tax Add back depreciation

Here the depreciation is $14,000,000*14.40%(year 3 rate of 10 year MACRS depreciation )=$2,016,000

the additional sales(benefit)=$2,100,000 Additional Cots =$1,000,000 Tax =40%

So Net Operating cash flow after tax =$2,100,000-$1,000,000-$2,016,000+$366,400(-916,400*40%)its added back since its a tax refund +$2,016,000 we get $1,466,400