Question

USA Inc is considering a new 10-year project that will generate additional sales revenue of $200,000 per year. The associated costs are $120,000 per year. The required rate of return for the project is 12%. The tax rate is 40%. What is the present value of the after-tax operating cash flows?

a. $250,374

b. $271,211

c. $417,289

d. $452,018

Answer 1

The present value is computed as shown below:

= Future value / (1 + r)ⁿ

The after tax operating cash flow is computed as follows:

= (Sales revenue - costs) - tax @ 40%

= ($ 200,000 - $ 120,000) - 40%

= $ 48,000

So, the present value is computed as follows:

= $ 48,000 / 1.12¹ + $ 48,000 / 1.12² + $ 48,000 / 1.12³ + $ 48,000 / 1.12⁴ + $ 48,000 / 1.12⁵ + $ 48,000 / 1.12⁶ + $ 48,000 / 1.12⁷ + $ 48,000 / 1.12⁸ + $ 48,000 / 1.12⁹ + $ 48,000 / 1.12¹⁰

= $ 271,211 Approximately

So, the correct answer is option b.

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