Question

What is the operating cash flow for year 5 of project A that Orange Valley Shipping should use in its NPV analysis of the project? The tax rate is 15 percent. During year 5, project A is expected to have relevant revenue of 70,000 dollars, relevant variable costs of 28,000 dollars, and relevant depreciation of 16,000 dollars. In addition, Orange Valley Shipping would have one source of fixed costs associated with the project A. Yesterday, Orange Valley Shipping signed a deal with Yasmin Advertising to develop a marketing campaign. The terms of the deal require Orange Valley Shipping to pay Yasmin Advertising either 24,000 dollars in 5 years if project A is pursued or 18,000 dollars in 5 years if project A is not pursued. Finally, the equipment purchased for the project would be sold in 5 years for an expected after-tax cash flow of 13,000 dollars.

Answer 1

In this case the fixed cost is $24000 but even if the project was not done still 18000 will have to be paid .Thus rrlevanr fixed cost is 6000.It can be equally divided into 5 years i.e $1200 per year.Below table shows the cahshflow.

Since salvage value is after tax it has been added seperately in table

Details

year	revenue -[r]	variable cost [v]	relevant fixed cost [rf]	depreciation[d]	taxable income   [ r-v-rf-d]	tax [taxable income*.15]	cash inflow [r-v-rf-tax]	additional inflow(salvage value)	final cash inflow
1	70000	28000	1200	16000	24800	3720	37080		37080
2	70000	28000	1200	16000	24800	3720	37080		37080
3	70000	28000	1200	16000	24800	3720	37080		37080
4	70000	28000	1200	16000	24800	3720	37080		37080
5	70000	28000	1200	16000	24800	3720	37080	13000	50080