4 Long Term Financial Management

In order to find our incremental cash flow amounts, we must first break down the eight-year period into nine timeframes. T-0 would be the investment period that proceeds the first year of actual production. T-1 through T-8 would correlate with the eight years that we are trying to find the incremental cash flow amounts for. The amount of revenue for all eight years was given in our assignment as $950,000 the first year and $1,500,000 each year thereafter. Direct costs are given as being equal to 55% of sales (revenues). For this answer, we need to take our revenue for each year and multiply the revenue amount times 0.55. For instance for year one, we would multiply $950,000 times 0.55 and we get $522,500 for our direct costs for that year. The indirect costs are given to us as an estimated total each year of $80,000. Therefore, we just enter the amount into each individual year. Depreciation expense is taken for the $1,000,000 for the new plant that was needed. The depreciation is being taken straight line for 5 years. So therefore, we divide $1,000,000 by 5 and we get $200,000 for the first five years of our production. Next, we need to figure out the net income before taxes. To find this number for each year, we need to subtract all expenses from our revenue. For instance, the first year would be $950,000-$522,500-$80,000-$200,000 = $147,500. We use this same method in order to get our net income before taxes for each year. We are given the fact that taxes are paid at 35%. Therefore, we multiply our net income before taxes by 0.35 to get our tax amount for each year. We then subtract the taxes from the net income before taxes to get the total of the net income after taxes for each year. Next, we need to add the $200,000 back at the end of year eight for net investment ...
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