OPPapers.com

Financial Management

FIN 410

Individual Project 4

1. Prepare a statement showing the incremental cash flows for this project over an 8-year period.

-Initial investment:

I = $1,000,000

-Working Capital:

WC = $200,000

ChWCi = Previous Year WC - Current WC = 0 (for i=1 to 7)
ChWC0 = -$200,000

The working capital is recovered, this means that for the end of the year 8 it will be zero or:
ChWC8 = $200,000

-Depreciation:
Di = (Invest in plant and equipment)/5 = $1,000,000/5 = $200,000

For the years 6 to 8 the depreciation will be zero.

-Revenues:
R1 = $950,000

For the years Yi (i=2 to 8):
Ri = $1,500,000

-Expenses:
Indirect incremental costs will be $80,000 all the eight years.
For each year the direct costs will be 0.55*Ri .
Then for each year Yi (i=1 to 8), the expenses (Ei) will be:

Ei = $80,000 + 0.55*Ri ,
then:

E1 = $80,000 + 0.55*$950,000 = $602,500

For i=2 to 8:
Ei = $80,000 + 0.55*$1,500,000 = $905,000

-Taxes:
The firm's marginal tax rate is 35%, then the taxes will be:
T1 = 0.35*($950,000-$602,500-$200,000) = $51,625

For i=2 to 5
Ti = 0.35*($1,500,000-$905,000-$200,000) = $138,250

For i=6 to 8
Ti = 0.35*($1,500,000-$905,000-$0) = $208,250

YEARS (IN THOUSANDS)

0 1 2 3 4 5 6 7 8


1.Revenues 0 950 1500 1500 1500 1500 1500 1500 1500

2.Expenses 0 602.5 905 905 905 905 905 905 905

3.Depreciation 0 200 200 200 200 200 0 0 0

4.Income before 0 147.5 395 395 395 395 595 595 595
tax, [1-(2+3)]

5.Taxes 0 51.6 138.2 138.2 138.2 138.2 238.2 238.2 238.2

6.Net Income 0 95.9 256.8 256.8 256.8 256.8 356.8 356.8 356.8
[4-5]

7.Cash flow
from operation 0 295.9 456.8 456.8 456.8 456.8 356.8 356.8 356.8
[1-2-5]

--------------------------------------------------------------...