Suppose you have been hired as a financial consultant to Defense Electronics, In

Question

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $5.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6 million. In five years, the aftertax value of the land will be $6.4 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.56 million to build. The following market data on DEI

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $5.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6 million. In five years, the aftertax value of the land will be $6.4 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.56 million to build. The following market data on DEI

Explanation / Answer

Calculation of Operating Cash Flow

Note 1: There is no information about depreciation in the question given. Since I have not taken any value but if have the full information about the life of plant and equipment, life of asset, salvage value and method of depreciation then please calculate it.

SLM basis = value at which purchased - salvage value

                                    Life of asset

WDV method = Value at which asset purchased * rate of depreciation

Please apply the following formula and get the answer.

Note 2: If the profit before tax(PBT) is negative then there will be savings in tax named as tax shelter. This will be considered if there are other profits to write off the loss of the company this year.

Tax shelter = PBT * Tax rate

Then PBT(loss) + tax = PAT(loss) + depreciation = CFAT (positive)

Particulars Workings/Notes $ a) Sales 11,150*20,500        228,575,000 b) Less: fixed cost            7,500,000 c) Less: variable cost 9,750*20,500        199,875,000 d) Profit before depreciation, interest and tax (a-b-c)          21,200,000 e) Less: depreciation - f) Less: Annual Interest cost on debt paid semi annually 237,000*1,000*7.4%          17,538,000 g) Profit before tax (d-e-f)            3,662,000 h) Less: tax @ 38% (g*38%)            1,391,560 i) Profit after tax (g-h)            2,270,440 j) Add: depreciation                        -   k) Operating Cash Flow (i+j)            2,270,440

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