Question

# A new project will require equipment to manufacture that will cost \$ 5 million, which will...

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?

 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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