Question

Determine the Investment cash flow, Operating cash flow, and Net cash flow based on the following...

Determine the Investment cash flow, Operating cash flow, and Net cash flow based on the following assumptions. Initial investment of $120,000 to purchase and install a piece of equipment for an expansion project, 5 year straight line depreciation, $10,000 sale of equipment at the end of five years. The new equipment will increase pre tax revenue by $100,000 annually and increase operating expenses by $25,000 annually. The tax rate is 30%

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Answer #1

Investment cash flow :

Initial investment : - $ 120,000

Sale of equipment : $ 10,000

Net investment cash outflow : - $ 110,000

Operating cash flow:

Increase in pre tax revenue : $ 100,000

Increase in operating expenses: - $ 25,000

Net operating cash flow pre tax: $ 75,000

Tax @ 30% : $ 22,500

After tax cash inflow : $ 52,500

Add: Tax savings due to depreciation : $ 6,600 (note 1)

Net post tax operating cash flow: $ 59,100

Note 1: Tax savings due to depreciation:

= Depreciation × Tax rate = 22000 × 30% = $ 6,600

Depreciation = (cost - salvage value) ÷ life of asset

= (120000 - 10000) ÷ 5 = 22,000

Overall net cash flow :

Investing cash flow + operating cash flow

= -110,000 + 59100

= - $ 50,900

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