A project costs $70M. It will provide additional revenue of 20M per year for 30

Question

A project costs $70M. It will provide additional revenue of 20M per year for 30 years while also costing 5M per year to run. It will require an addition to net working capital of 3M for the life of the project. Project will be depreciated straight line to zero over the project's life. The tax rate is 35%. The investment is expected to be sold for scrap for S500,000 at the end of the project. Let R 6.57% 1) What is depreciation per year? 2) What is OCF per year? 3) What is the present value of the OCF? What is ATSV? 5) What is present value of ATSV?

Explanation / Answer

1.Depreciation = (Cost- salvage value)/useful life

=(70,000,000-500,000)/30

=2316667

Or 2.31 M

2.Calculating operating cash flow(all figures in million)

we calculate gross profit by subtracting revenue from cost.

Tax is 35% of gross profit, and that gives net income of 9.75M. Add back depreciation, subtract working capital to get OCF of 9.06M

revenue

20

-cost

5

gross profit

15

-tax

5.25

net income

9.75

+dep

2.31

-wc

3

ocf

9.06

3. Present value of OCF is OCF/year divided by int rate

i.e. 9.06/6.57% = 138 M

4. ATSV

ATSV = salvage value- ((salvage value- book value)*tax rate)

= 500,000- ((500,000-0)*.35)

=325000

revenue

20

-cost

5

gross profit

15

-tax

5.25

net income

9.75

+dep

2.31

-wc

3

ocf

9.06

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.