Your fledgling company currently manufactures cheap t-shirts that are sold to of

Question

Your fledgling company currently manufactures cheap t-shirts that are sold to often inebriated students on Spring Break. Many of them seem to get sunburned since they don’t have the sense to put on sunscreen. Thus, as a public service, you have decided to expand your product line and offer equally cheap hats. To do so will require purchasing new equipment. You have the following information on this investment project, what are the after-tax cash flows that it is expected to generate? (my answers are in thousands) Cost of hat making machinery: $100,000 Expected life of machinery: 5 years Expected Salvage Value of hat making machinery after 5 years: $20,000 Depreciation method: straight line Expected sales of hats: $140,000 per year Cost of raw material: $70,000 per year Cost of additional labor: $30,000 per year Additional Net Working Capital required at the start of the project: $30,000 Tax rate: 35%

Explanation / Answer

Depreciation as per straight line method = (100000 - 20000) / 5 = $16000 per year Calculation after tax cash flows In $ Sales 140000 Less : Expenses - Cost of Raw Material 70000 - Cost of Labour 30000 - Depreciation 16000 Pre tax Profit 24000 Less : Tax @ 35% 8400 Post tax Profit 15600 Add : Depreciation 16000 After tax cash flows 31600

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