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 &nb ...