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