Logo

AskSia

Plus

REBELS Corporation is considering a new project. The firm is in the 34% marginal...
Sep 29, 2024
REBELS Corporation is considering a new project. The firm is in the 34% marginal tax bracket with a 15% required rate of return. This project involves the introduction of a new product, and it is expected to last in 5 years’ time. Below is the information on the new project: Cost of new plant and equipment: 50,000,000Year12345Unitssold100,000130,000160,000100,00060,000Salespriceperunit:50,000,000 Year 1 2 3 4 5 Units sold 100,000 130,000 160,000 100,000 60,000 Sales price per unit: 500 per unit in years 1 through 4, 380perunitinyear5.Variablecostperunit:380 per unit in year 5. Variable cost per unit: 260 per unit. Annual fixed costs: $300,000. The depreciation method: Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years. You are required: i) Determine the operating cash flows associated with the project. (15 marks)
Solution by Steps
step 1
Calculate the annual depreciation using the straight-line method. The formula for straight-line depreciation is: Depreciation=CostLifespan=50,000,0005=10,000,000 \text{Depreciation} = \frac{\text{Cost}}{\text{Lifespan}} = \frac{50,000,000}{5} = 10,000,000
step 2
Determine the total revenue for each year. The revenue for each year is calculated as: Revenue=Units Sold×Sales Price \text{Revenue} = \text{Units Sold} \times \text{Sales Price} . Thus, for each year: - Year 1: 100,000×500=50,000,000 100,000 \times 500 = 50,000,000 - Year 2: 130,000×500=65,000,000 130,000 \times 500 = 65,000,000 - Year 3: 160,000×500=80,000,000 160,000 \times 500 = 80,000,000 - Year 4: 100,000×500=50,000,000 100,000 \times 500 = 50,000,000 - Year 5: 60,000×380=22,800,000 60,000 \times 380 = 22,800,000
step 3
Calculate the total variable costs for each year. The variable cost for each year is calculated as: Variable Cost=Units Sold×Variable Cost per Unit \text{Variable Cost} = \text{Units Sold} \times \text{Variable Cost per Unit} . Thus, for each year: - Year 1: 100,000×260=26,000,000 100,000 \times 260 = 26,000,000 - Year 2: 130,000×260=33,800,000 130,000 \times 260 = 33,800,000 - Year 3: 160,000×260=41,600,000 160,000 \times 260 = 41,600,000 - Year 4: 100,000×260=26,000,000 100,000 \times 260 = 26,000,000 - Year 5: 60,000×260=15,600,000 60,000 \times 260 = 15,600,000
step 4
Calculate the total operating costs for each year, which includes variable costs and fixed costs. The formula is: Total Operating Costs=Variable Costs+Fixed Costs \text{Total Operating Costs} = \text{Variable Costs} + \text{Fixed Costs} . Thus, for each year: - Year 1: 26,000,000+300,000=26,300,000 26,000,000 + 300,000 = 26,300,000 - Year 2: 33,800,000+300,000=34,100,000 33,800,000 + 300,000 = 34,100,000 - Year 3: 41,600,000+300,000=41,900,000 41,600,000 + 300,000 = 41,900,000 - Year 4: 26,000,000+300,000=26,300,000 26,000,000 + 300,000 = 26,300,000 - Year 5: 15,600,000+300,000=15,900,000 15,600,000 + 300,000 = 15,900,000
step 5
Calculate the operating income for each year. The formula is: Operating Income=Revenue−Total Operating Costs \text{Operating Income} = \text{Revenue} - \text{Total Operating Costs} . Thus, for each year: - Year 1: 50,000,000−26,300,000=23,700,000 50,000,000 - 26,300,000 = 23,700,000 - Year 2: 65,000,000−34,100,000=30,900,000 65,000,000 - 34,100,000 = 30,900,000 - Year 3: 80,000,000−41,900,000=38,100,000 80,000,000 - 41,900,000 = 38,100,000 - Year 4: 50,000,000−26,300,000=23,700,000 50,000,000 - 26,300,000 = 23,700,000 - Year 5: 22,800,000−15,900,000=6,900,000 22,800,000 - 15,900,000 = 6,900,000
step 6
Calculate the taxable income by subtracting depreciation from operating income. The formula is: Taxable Income=Operating Income−Depreciation \text{Taxable Income} = \text{Operating Income} - \text{Depreciation} . Thus, for each year: - Year 1: 23,700,000−10,000,000=13,700,000 23,700,000 - 10,000,000 = 13,700,000 - Year 2: 30,900,000−10,000,000=20,900,000 30,900,000 - 10,000,000 = 20,900,000 - Year 3: 38,100,000−10,000,000=28,100,000 38,100,000 - 10,000,000 = 28,100,000 - Year 4: 23,700,000−10,000,000=13,700,000 23,700,000 - 10,000,000 = 13,700,000 - Year 5: 6,900,000−10,000,000=−3,100,000 6,900,000 - 10,000,000 = -3,100,000
step 7
Calculate the tax for each year using the marginal tax rate of 34%. The formula is: Tax=Taxable Income×0.34 \text{Tax} = \text{Taxable Income} \times 0.34 . Thus, for each year: - Year 1: 13,700,000×0.34=4,658,000 13,700,000 \times 0.34 = 4,658,000 - Year 2: 20,900,000×0.34=7,106,000 20,900,000 \times 0.34 = 7,106,000 - Year 3: 28,100,000×0.34=9,554,000 28,100,000 \times 0.34 = 9,554,000 - Year 4: 13,700,000×0.34=4,658,000 13,700,000 \times 0.34 = 4,658,000 - Year 5: −3,100,000×0.34=0 -3,100,000 \times 0.34 = 0 (no tax on negative income)
step 8
Calculate the operating cash flow for each year. The formula is: Operating Cash Flow=Operating Income−Tax+Depreciation \text{Operating Cash Flow} = \text{Operating Income} - \text{Tax} + \text{Depreciation} . Thus, for each year: - Year 1: 23,700,000−4,658,000+10,000,000=29,042,000 23,700,000 - 4,658,000 + 10,000,000 = 29,042,000 - Year 2: 30,900,000−7,106,000+10,000,000=33,794,000 30,900,000 - 7,106,000 + 10,000,000 = 33,794,000 - Year 3: 38,100,000−9,554,000+10,000,000=38,546,000 38,100,000 - 9,554,000 + 10,000,000 = 38,546,000 - Year 4: 23,700,000−4,658,000+10,000,000=29,042,000 23,700,000 - 4,658,000 + 10,000,000 = 29,042,000 - Year 5: 6,900,000−0+10,000,000=16,900,000 6,900,000 - 0 + 10,000,000 = 16,900,000
Answer
The operating cash flows for the project over the 5 years are: - Year 1: 29,042,000−Year2:29,042,000 - Year 2: 33,794,000 - Year 3: 38,546,000−Year4:38,546,000 - Year 4: 29,042,000 - Year 5: $16,900,000
Key Concept
Operating cash flow is a measure of the cash generated by a company's normal business operations. It is crucial for assessing the viability of a project.
Explanation
The operating cash flow is calculated by considering revenues, costs, taxes, and depreciation, providing insight into the project's financial performance over its lifespan.
© 2023 AskSia.AI all rights reserved