Question

1.

Fill in the Blanks

A $1,000,000 investment is depreciated using a seven-year MACRS class life.

It requires $150,000 in additional inventory and will increase accounts payable by $50,000.

It will generate $400,000 in revenue and $150,000 in cash expenses annually, and the tax rate is 40%.

What is the incremental cash flow in years 0,

Year 1

Year 7

Year 8?

Answer 1

Cashflows of Year-0
Initial Investment			-1000000
WC investment (150000-50000)			-100000
Cashflows of Year-0			-1100000.00
Cshflows of Year -1
Revenue			400000.00
Less: Expenses			150000.00
Less: Depreciation (1000000*14.29%)			142900.00
Before tax Income			107100.00
Less: Tax @ 40%			42840
After tax Income			64260
Add: Depreciation			142900.00
Cashflows of Year-1			207160.00
Cashflows of Year-7
Revenue			400000.00
Less: Expenses			150000.00
Less: Depreciation (1000000*8.93%)			89300.00
Before tax Income			160700.00
Less: Tax @ 40%			64280
After tax Income			96420
Add: Depreciation			89300.00
Cashflows of Year-7			185720.00
Cashflows of Year-8
Revenue			400000.00
Less: Expenses			150000.00
Less: Depreciation (1000000*4.46%)			44600.00
Before tax Income			205400.00
Less: Tax @ 40%			82160
After tax Income			123240
Add: Depreciation			44600.00
Operating cashflows			167840.00
Add: WC release			100000
Cashflows of Year-8			267840.00