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    Total incremental after-tax flows

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    A local toy store is considering opening a new coffee shop. The coffee shop will occupy space next door in the same building. That space is currently being rented out to a tenant for $30,000 per year. The project will require an upfront investment of $200,000 today in order to pay for remodeling the space and the new equipment. Assume that all of this investment is expected to last for 3 years (the life of the project), and will be depreciated using MACRS over a three-year class life. Three-year class life MACRS implies depreciation percentages of 33%, 45%, 15%, and 7% over years one through four, respectively. At the end of the three years, the store believes it can sell the equipment for $10,000. The store expects the new coffee shop to generate sales revenue from the project of $200,000 per year, with expenses (other than depreciation and taxes) of $40,000 per year. The project will require an investment in net working capital of 10% of sales, to be in place at the beginning of each year (i.e., working capital in year t is based on sales in year t+1). Assume a marginal tax rate of 30%. What are the total incremental after-tax cash flows associated with the project? Clearly label your cash flows - inflows as positive and outflows as negative.

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    Solution Preview

    CASH OUTFLOWS
    Investment in Fixed Assets
    Total equipment 200000
    Investment in Working capital 20000

    Total cash outflow 220000

    Cost of new equipment 200000
    Year 1 Year 2 Year 3 Year ...

    Solution Summary

    This solution calculates the total incremental after-tax cash flows with a given depreciation, class life and sales revenue.

    $2.19