Question

The Amelia Rose Company I installing a new delivery system. The system will cost $115,000 and is expected to provide an increase of $15,000 in revenues each year of its expected 10 year economic life. The system will be depreciated on a straight line basis and will have a salvage value of $12,000 at the end of its useful life. The project will also be more efficient than the current system and will cut cash expenses by $4,000 per year. The firm is in the 38% tax bracket.

What will the incremental cash flow for the project be in the first year of the project’s life?

Answer 1

Answer>

Cost of the new delivery system = 115000

Salvage value = 12000

Considering straight line depreciation, depreciation expenses per year would be:

(115000 - 12000)/10 = 103000/10 = 10300

Incremental revenue generated = 15000

Incremental cash expenses created = -4000

Tax = 38%

Incremental cash flow before tax =

Incremental revenue

- Incremental COGS

- Incremental Depreciation expenses

- Incremental Cash expenses

Therefore, Incremental cash flow before tax = 15000 - 0 - 10300 + 4000 (since cash expenses get reduced)

Incremental cash flow before tax = 8700

Incremental cash flow after tax = (1-0.38)*8700 = 0.62*8700 = 5394

Hence the incremental cash flow in the first year is expected to be $5,394