What are the four main pieces needed to estimate a project’s incremental cash fl

Question

What are the four main pieces needed to estimate a project’s incremental cash flows?

After you receive your BA degree from Temple, your lifetime earnings are $3 million. A friend who is identical in every way but with no college degree has lifetime earnings over the same period of $2 million. What are your incremental lifetime earnings attributable to your Temple BA?

Make up an example of sunk, erosion and opportunity costs and an example of a synergy gain.

For an asset in the 5-year MACRS category with an acquisition cost of $2 million and installation costs of $500,000, what is the difference in the first year’s depreciation expense between straight line and MACRS? How about in the first two years combined?

Assuming no interest expense, if EBIT is $5 million, depreciation expense is $1.5 million and the tax rate is 35%, what is OCF?

Make up a numerical example to illustrate cash flow from salvage where the asset is sold at (a) a gain; and (b) a loss. How does the cash flow from salvage compare to the selling price of the asset in each of these cases?

8. Incremental cash flows are estimated to be in order -$2 million, $0.5 million, $4.0 million and $0.75 million. If the cost of capital is 8%, what is the NPV of this project?

Explanation / Answer

Question :For an asset in the 5-year MACRS category with an acquisition cost of $2 million and installation costs of $500,000, what is the difference in the first year’s depreciation expense between straight line and MACRS? How about in the first two years combined?

Answer : For the first year:

Straigth line = 2,000,000/5 = 400,000

MACRS = 20% = 0.2*2,000,000 = 400,000

Hence the difference is Zero (0)

For the first two years

Straight line: 400,000 + 400,000 = 800,000

The MACRS = 20% for year 1 + 32% for year 2 = 400,000 + 640,000 = 1,040,000

Hence difference = 1,040,000 - 800,000 = 240,000

Question 8:Incremental cash flows are estimated to be in order -$2 million, $0.5 million, $4.0 million and $0.75 million. If the cost of capital is 8%, what is the NPV of this project?

Answer: The NPV of the project is calculated as follows:

NPV = -2,000,000 + 500,000/1.08 + 4,000,000/1.08^2 + 750,000/1.08^3 = 2,487,692.43

The NPV of this project = $ 2,487,692.43

Question:Assuming no interest expense, if EBIT is $5 million, depreciation expense is $1.5 million and the tax rate is 35%, what is OCF?

Answer :

The OCF is $4,750,000

Question :After you receive your BA degree from Temple, your lifetime earnings are $3 million. A friend who is identical in every way but with no college degree has lifetime earnings over the same period of $2 million. What are your incremental lifetime earnings attributable to your Temple BA?

Answer: Incremental life time earnings = 3,000,000 -2,000,000 =1,000,000

Your incremental lifetime earnings attributable to your Temple BA = $1,000,000 = $ 1 million

Note: We have answered 4 questions. Kindly repost remianing for experts to answer

EBIT 5000000 tax 1750000 Profit after tax 3250000 Add back depreciation 1500000 OCF 4750000

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