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Operating Cash Flow and Capital Budgeting Analysis

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1. A new machine being considered to replace an old one will decrease the firm's operating costs by $10,000 annually. The firm's tax rate is 40%. For capital budgeting, what is the annual after tax cash flow associated to this savings?

2. A firm is considering a project with data shown below. What is the project's operating cash flow for year 1?

Sales revenues $35,000
Depreciation $10,000
Other operating costs (excl dep) $17,000
Interest Exp $4,000
Common stock divs $2,000
Tax rate 35%

3. A firm is in the final year of a project. The equipment originally cost $20,000 of which 75% has been depreciated. The equipment can be sold today for $6,000 and its tax rate is 40%. What is the net equipments after-tax salvage value for use in capital budgeting analysis?

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Solution Preview

1. Reduction in Operating Cost = $10,000

Tax Rate = 40%

Expenses on Tax= 40% x 10,000 = $4,000

After Tax Cash Flow savings = $6000

think of it this way, if in the past revenue was ...

Solution Summary

This solution shows step-by-step calculations to determine the reduction in operating cost, after tax cash flow savings, taxable income, taxable profit and after tax salvage value.

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Similar Posting

The President of Indigo Inc. has asked you to evaluate the proposed asset acquisition

Please see attached file.
1) What is the net investment required at t = 0?
2) What is the operating cash flow in Year 1?
3) What is the operating cash flow in Year 2?
4) What is the operating cash flow in Year 3?
5) What is the project's NPV?

6) After seeing your analysis, the president has asked to recalculate the NPV if the sales volume is only 80,000 units per year instead of 100,000. This is an example of (or a component of)
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis

7) After you reevaluated the project based on the lower sales volume, the president asked you to reevaluate the project again, this time considering a lower and higher sales price, a higher and lower variable cost, a higher and lower fixed cost, and a lower and higher salvage value, showing the difference in NPV for the change in each variable. This exercise is an example of:
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis

8) The boss then asks you to recalculate NPV based on the worst case sales volume, worst case variable cost, and worst case sales price representing an overall downturn in market demand combined with inflationary input markets. In response to this request, you will perform:
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis

9) Finally, your boss asks you to calculate, based on the expected values for the sales price and fixed and variable costs, the sales volume required for the net income from the project to cover the cost of the investment. She has requested that you perform
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis
D) An unnecessary exercise that will be completely ignored by the capital budgeting committee

10) What is the final cash flow in year 4?

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