FIN 300 Lecture Notes - Lecture 3: Operating Cash Flow, Tax Shield, Cash Flow

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ochremarten208

12 Oct 2016

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Remember that capital budgeting problems are based on cash flow from assets which is composed of three types of cash flows; 1) capital expenditure / sales, 2) operating cash flows and, 3) changes in nwc. We will be using the cca tax shield formula to solve all of these problems so we will write the operating cash flow as: The first term, (s-c)(1-t) is the after tax operating cash flow but ignoring the impact of depreciation. Remember depreciation (i. e. cca) in and of itself is not important (it"s a non cash item) however it does reduce your taxes. Cca tax shield which represents the dollar reduction in your taxes, in a given year, due to the ability to deduct cca before calculating your taxable income. T = corp tax rate r = cost of capital. S = salvage value n = life of project.

Related Questions

Use the following data for the remaining problems.

Capstone Quarry is analyzing whether a new contract proposal will be a good idea. The relevant data is shown below. The net working capital will be paid in the same time period as the cost of the equipment and will be recovered at the end of the project. Remember to calculate the after-tax gain or loss of salvage as part of your terminal cash flow.

Capstone Quarry Company Contract Analysis
Amount of Rock Salt per Year	23,000 Tons
Revenue per Ton	$ 145
Cost of Equipment	$ 2,750,000
Life(years)	5
MACRS Class	5
Fixed Cost per year	$ 475,000
Var Cost/Ton	$ 85
Actual Salvage	$ 105,000
Change in NWC	$ 85,000
Required Return	12%
Tax Rate	34%

***Just Need These Answers***

24) IRR

25) MIRR

Hint:

Annual Cash Flows for Capstone Quarry

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Outlay
Unit Sales
Sales
Variable Costs
Fixed Costs
Depreciation
Taxable Cash Flows
Taxes
Add: Depreciation
Annual After-Tax Cash Flow
Terminal Cash Flow
Total Annual Cash Flows

amethystsheep348

Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.90 million, operating costs of $3.90 million, and a depreciation expense of $.90 million. Assume the tax rate is 30%.

a.	Calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.)

Method	Cash Flow
Adjusted accounting profits	$ million
Cash inflow/cash outflow analysis	million
Depreciation tax shield approach	million

Are the above answers equal?

	Yes

Revenues generated by a new fad product are forecast as follows:

Year	Revenues
1	$50,000
2	40,000
3	20,000
4	10,000
Thereafter	0

Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment.

a.	What is the initial investment in the product? Remember working capital.

Initial investment

If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firmâs tax rate is 30%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.)

Year	Cash Flow
1	$
2
3
4

c.	If the opportunity cost of capital is 12%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV

d.	What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

IRR

rev: 09_24_2015_QC_CS-26391, 02_03_2015

purplejackal462

Use the following data for the remaining problems.

Capstone Quarry Company Contract Analysis
Amount of Rock Salt per Year	23,000 Tons
Revenue per Ton	$ 145
Cost of Equipment	$ 2,750,000
Life(years)	5
MACRS Class	5
Fixed Cost per year	$ 475,000
Var Cost/Ton	$ 85
Actual Salvage	$ 105,000
Change in NWC	$ 85,000
Required Return	12%
Tax Rate	34%

20) Find the cash flows for each year

21) Net present value

22) Payback period

23) Discounted payback

24) IRR

25) MIRR

Hint:

Annual Cash Flows for Capstone Quarry

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Outlay
Unit Sales
Sales
Variable Costs
Fixed Costs
Depreciation
Taxable Cash Flows
Taxes
Add: Depreciation
Annual After-Tax Cash Flow
Terminal Cash Flow
Total Annual Cash Flows

ochrebear287

FIN 300 Lecture Notes - Lecture 3: Operating Cash Flow, Tax Shield, Cash Flow

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