20. You are opening your own business and estimate the following expenses and re

ID: 2821782 • Letter: 2

Question

20. You are opening your own business and estimate the following expenses and revenues: Revenues year 1 $228,000 growing at 9% thereafter Cost of goods sold year 1 $101,000 growing at 12% thereafter Operating expense year 1 $41,000 growing at 6% thereafter Taxes all in years 25% per year Depreciation $15,000 in year 1, $18,000 in year 2, $12,000 in year 3 No working capital is needed -- please predict the after-tax cash flows from operations for the first three years of operations below: Year 1_______________ Year 2__________________ and Year 3______________

Explanation / Answer

Cash flow = Revenue - Cost of goods - Operating expenses

Year 1:

Cash flow1 = 228,000-101,000-41,000 = 86,000

Year 2:

Cash flow2 = 228,000 x (1+9%) -101,000 x (1+12%) -41,000 x (1+6%) = 91,940

Year 3:

Cash flow3 = 228,000 x (1+9%)^2 -101,000 x (1+12%)^2 -41,000 x (1+6%)^2 = 98,124.80

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After-tax cash flow illustrated below:

After-tax cash flow = (CF-D)x(1-Tax rate)+D

$86,000.00

$15,000.00

$68,250.00

$91,940.00

$18,000.00

$73,455.00

$98,124.80

$12,000.00

$76,593.60