Question

"The revenue for a project in year 5 is $34,000 in constant (year-0) dollars. Expenses (not including depreciation) in the same year is $26,000 in constant (year-0) dollars. Depreciation in that same year is $8815. If there were no inflation, the net income for year 5 would be $-481 in constant (year-0) dollars. If the inflation rate is 6%, what is the net cash flow in year 5 in actual dollars? Assume there are no investments or salvage values in this year. Hint: you will need to calculate the tax rate. The answer could be a negative number."

Answer 1

Calculations for Finding tax savings

Revenue	34000
Expenses	26000
Depreciation	8815
Profit before tax	-815
Profit after tax( given)	-481
Tax Savings (-815--481	334
Tax savings/ PBT	0.409815951

So tax rate = 40.9815951%,

Calculation of net cash flow in year 5 in actual dollars as follows

	year0 term	Inflation factor	Actual Dollars
Revenue	34000	1.3382255776000	45499.66963840
Expenses	26000	1.3382255776000	34793.86501760
Depreciation			8815.00000000
Profit before tax			1890.80462080
Tax @ 40.9815951%			774.88189368
Profit after tax			1115.92272712
Add: depreciation			8815.00000000
net cash flow in year 5 in actual dollars			9930.92272712

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