Question

Pasha Entertainment is evaluating a new project that will have a life of 5 years. This project is estimated to generate sales of $250,000 each year. The annual costs are estimated to be $165,000. At Time 0, Pasha will need to invest $475,000 in new fixed assets. This will be depreciated on a straight-line method over the life of the project with no salvage value. Management has indicated that the sales and costs for this project are accurate within a range of +/-10 percent. The tax rate is 40 percent. For the best case scenario, compute the annual operating cash flow.

Answer 1

Project life = 5 years
Sales : $ 250,000 ; Cost pa = $ 165000 ; Fixed Assets = $ 475000; Depreciation (over 5 years) = 475000/5 = $ 95000

Best case scenario (of +- 10% variance in costs and sales)

Sales positive variance = 250000 + 10% = 250000+25000 = $ 275000

Costs negative variance = 165000 -10% = 165000(1-10%) = $ 148500

Best case Profit = 275000 - 148500 = $126,500

Tax rate = 40%

Post tax cash Flows = (Profit before depreciation + Depreciation * tax rate ) ----> Only tax benefit taken , since dep is non-cash

Post tax cash flows = 126500 + 95000*40% = $ 164,500

Annual operating cash flow = $ 164,500