Question

A new project will require equipment to manufacture that will cost $ 5 million, which will be depreciated by straight- line depreciation over five years. In addition, there will be $ 6 million spent on marketing in year one. It is expected that the project will bring in revenues of $10 million per year for five years with production and support costs of $ 3 million per year. If the firms’ marginal tax rate is 35%, what is the cash flow in the second year of this project?

Answer #1

Calculation of free cash flow in year 2 |
||||

Expected revenue |
10000000 | |||

Less : Production and support cost |
-3000000 | |||

Less : Depreciation (5000000/5) |
-1000000 | |||

_____________ | ||||

Profit before tax |
6000000 | |||

Less : Tax | 35% | -2100000 | ||

_____________ | ||||

Profit after tax |
3900000 | |||

Add : Depreciation |
||||

(it is non cash exp. so added back ) |
1000000 | |||

_____________ | ||||

Free cash flow |
4900000 | |||

_____________ | ||||

So, cash flow in year second is $4,900,000 |

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