(Calculating free cash flows) Vandelay Industries is considering a new project w
ID: 2654138 • Letter: #
Question
(Calculating free cash flows) Vandelay Industries is considering a new project with a 4-year life with the following cost and revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the simplified straight-line method and has no salvage value. This new project will generate additional sales revenue of $112,000 while additional operating costs, excluding depreciation, will be $68,000. Vandelay's marginal tax rate is 35 percent. What is the project's free cash flow in year 1?
Please help by writing out formulas so I can better understand how to set up the equations for future problems. Thank you for your help.
Explanation / Answer
Given
Capital Expenditure = $140000
Life = 4 Years
Sales revenue = $112000
Operating Cost = $ 68000
Depreciation/Year = Total Equipment Cost/Life of Equipment
= 140000/4 = $ 35000
Free Cash flow is the cash flow that is left over for distribution to the business owners after all operating and capital expenditure needs are satisfied
Free Cash Flow = Cash flow from Operations - Capital Expenditure
B.Operating Cost
Cash flow from operations = Operating Profit - Taxes
= 44000 - 3150
= $ 40850
Free Cash Flow = Cash flow from Operations - Capital Expenditure
= 40850 - 1404000
= $(99150)
So there is a net Free Cash outflow of $99150 in Year 1
Particulars Amount ($) A. Revenue 112000B.Operating Cost
68000 C. Operating Profit(A-B) 44000 D. Depreciation 35000 E. EBIT (C-D) 9000 F. Taxes ( E * 35% ) 3150 Net Profit after Taxes 5850Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.