A business expects the following revenues, cash expenses, and depreciation charg
ID: 2623061 • Letter: A
Question
A business expects the following revenues, cash expenses, and depreciation charges in the future:
Year 1 2
Revenues $98,000 $106,000
Cost of goods sold $38,000 $ 49,000
Selling expenses $11,000 $ 13,000
Other cash operating expenses $10,000 $ 11,000
Depreciation $ 9,500 $ 13,500
This business is in the 20 percent tax bracket. Please compute the after-tax cash flows from operations for this investment for each of the years.
After tax operating cash flow for Year 1___$33,100___ Year 2____$29,100__
Use the information above the answer the question below:
In addition to the estimates above the business needs 4 percent of revenues as a cash balance, 11 percent of the cost of goods sold as an inventory balance, 6 percent of the cost of goods sold as an accounts payable balance, and 5 percent of revenues as accrued expenses balance. All of these balances would be needed at the beginning of each year and are estimated from the year-end annual estimates of revenues and cash expenses given above. The business will end at the end of year 2 and all working capital balances will be collected (or realized) at their face value. Please calculate the incremental investment in working capital needed for years 0,1,and 2, and then recalculate the cash flows for the Lansing store investment.
Incremental investment in working capital Year 0___________Year 1___________ Year 2____________
Recalculated cash flows from operations Year 0___________Year 1___________ Year 2____________
Explanation / Answer
Particulars
Year-1
Year-2
Revenues
98000
106000
Less:- Cost of goods sold
(38000)
(49000)
Gross profit
60000
57000
Less:- Other cash operating expenses
(10000)
(11000)
Less:- Selling expenses
(11000)
(13000)
Less:- Depreciation
(9500)
(13500)
Profit before tax
29500
19500
Less:- Tax @ 20%
(5900)
(3900)
After tax
23600
15600
Add:- Depreciation
9500
13500
After tax operating cash flows
33100
29100
Increase in working capital = Increase in cash + Increase in inventory
Particulars
Year-1
Year-2
Revenues
98000
106000
Less:- Cost of goods sold
(38000)
(49000)
Gross profit
60000
57000
Less:- Other cash operating expenses
(10000)
(11000)
Less:- Selling expenses
(11000)
(13000)
Less:- Depreciation
(9500)
(13500)
Profit before tax
29500
19500
Less:- Tax @ 20%
(5900)
(3900)
After tax
23600
15600
Add:- Depreciation
9500
13500
After tax operating cash flows
33100
29100
Increase in working capital = Increase in cash + Increase in inventory
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