Question

6,

A firm has invested $800 in a new machine that is expected to generate cash flows over the next 4 years. The machine will be depreciated on a straight line basis down to zero by the end of its life. The firm projects their annual cash inflows at $650 per year and annual cash outflows at 280 per year. Assuming the tax rate of 33%, determine the firm's cash flow next year.

$_____

7, A distributor of computer software instruction manuals plans to expand distribution. Annual sales are currently $230000 and are expected to be $290000 one year from today. Assuming that expenses are 75% of sales each year, what is the cash flow one year from today if the tax rate is 34%? Assume straight line depreciation of $25,000.

$______

Answer 1

6). Depreciation = Cost of Machine / Useful life years = $800 / 4 = $200

Cash Flow next year = [(Cash Inflows - Cash Outflows) * (1 - t)] + [Depreciation * t]

= [($650 - $280) * (1 - 0.33)] + [$200 * 0.33]

= [$370 * 0.67] + $66

= $247.90 + $66 = $313.90

7). Cash Flow 1 year from today = [(Sales - Expenses) * (1 - t)] + [Depreciation * t]

= [{$290,000 - ($290,000 * 0.75)} * (1 - 0.34)] + [$25,000 * 0.34]

= [$72,500 * 0.66] + $8,500

= $47,850 + $8,500 = $56,350