8. Mr. Lim is analyzing a proposed 4-year project. You expect to sell 35,000 uni

Question

8. Mr. Lim is analyzing a proposed 4-year project. You expect to sell 35,000 units per year at an average selling price of $8.50 per unit. The initial cash outlay for fixed assets will he $180,000. These assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. The assets ll be worthless at the end of the project. Fixed costs are expected to be $13.000 and variable costs should be $3.40 per unit. The project requires an initial investment in net working capital of $15,000 which will he reoovered in full at the end of the project s life. What is the total project cash flow at the end of year 4 if the tax rate is 34 percent?

Explanation / Answer

1. Initial Cost 180000 Increase in working Capital 15000 Total Cost 195000 2. Depreciation Tax Saving at 34% 1st year 45000 15750 2nd Year 45000 15750 3rd year 45000 15750 4th year 45000 15750 3. Income per year Units sold 35000 Sale price 8.50 Sales revenue 35000*8,50 297500 4. operating costs Fixed Costs 13000 Variable cost 3.40*35000 119000 Total Operating cost 132000 5. profit before tax 165500 Tax at 34% 56270 Nett Operating profit 109230 6 Cash flow statement Cash outflow 1st year 2nd year 3rd year 4th year Total Initial cost 195000 Depreciation expenses 45000 45000 45000 45000 Total 240000 45000 45000 45000 375000 Cash in flow Nett operating profit 109230 109230 109230 109230 436920 Return back working capital 15000 15000 Tax saving on depreciation 15750 15750 15750 15750 63000 Total 124980 124980 124980 139980 514920 Nett cash in flow - Inflow - outflow 139920

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