Suppose a company has hired you to estimate the cash flows arising from a propos

Question

Suppose a company has hired you to estimate the cash flows arising from a proposed capital project, and you have been handed the relevant data below. The project being considered has a 5-year tax life, and at the end of Year 5 the asset will be worthless (i.e., salvage value = 0). The CFO suggests that you depreciate the asset by using the straight-line method over the 5 year life of the project. Revenues and other operating costs are as noted below, and will be constant over the period. What is the Year 1 net cash flow for this project?

Equipment cost: $150,000

Delivery and installation cost of equipment: $50,000
Straight-line depreciation rate: 20%
Sales revenue, each year: $100,000
Operating costs (excluding depreciation): $30,000
Tax rate: 40%

What is the Year 1 cash flow:

Explanation / Answer

Dep amount= (150000*.2= 30000)

100000-30000-30000-(.4x40000)+30000= $54000

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