An investment alternative in a project requires a capital cost of $100 million c

Question

An investment alternative in a project requires a capital cost of $100 million completed at time zero. The investment will produce a stream of revenue of $60 million per year over a 6-year period with operating costs of $20 million per year. General inflation is 5% and the rate of taxation is 40%. Assume an individual project basis for taxation in which the capital expenditure can be fully depreciated over the duration of the project on a straight line basis.

Calculate the annual after tax cash flow, in real/constant dollars, taking into account both taxation and inflation effects.

Also calculate the payback period based on annual after tax cash flows of constant dollars.

Explanation / Answer

Answer:

Payback period:

=3 years+4.336/34.451=3.13 year

Particulars 1 2 3 4 5 6 Revenue 60 63 66.15 69.4575 72.93038 76.57689 Less: operating cost 20 21 22.05 23.1525 24.31013 25.52563 EBIT 40 42 44.1 46.305 48.62025 51.05126 Less: dep 16.67 16.67 16.67 16.67 16.67 16.67 EBIT 23.33 25.33 27.43 29.635 31.95025 34.38126 Less: tax @ 40% 9.332 10.132 10.972 11.854 12.7801 13.75251 EAT 13.998 15.198 16.458 17.781 19.17015 20.62876 Add: Dep 16.67 16.67 16.67 16.67 16.67 16.67 Annual cash flow after tax 30.668 31.868 33.128 34.451 35.84015 37.29876

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