Suppose a company is considering an expansion project requiring an initial investment of
$840,000. The project has a life of 7 years and the initial investment amount would be
depreciated fully over the life of 7 years using prime cost (straight line) depreciation. The firm
faces a company tax rate of 30%. Based on the following information that relates exclusively to
this project, calculate the relevant year 2 incremental after tax cash flow of this project for capital
budgeting purposes.
Annual sales 90,000 units at $35 per unit
Variable costs $22 per unit
Fixed costs $400,000 per annum
Interest expense $55,000 per annum
+118651 I really do not know what I am talking about but I will play with it.
2 years of Profit before tax not including initial outlay.
$${\mathtt{90\,000}}{\mathtt{\,\times\,}}\left({\mathtt{35}}{\mathtt{\,\times\,}}{\mathtt{2}}{\mathtt{\,-\,}}{\mathtt{22}}{\mathtt{\,\times\,}}{\mathtt{2}}\right){\mathtt{\,-\,}}{\mathtt{400\,000}}{\mathtt{\,\times\,}}{\mathtt{2}}{\mathtt{\,-\,}}{\mathtt{55\,000}}{\mathtt{\,\times\,}}{\mathtt{2}} = {\mathtt{1\,430\,000}}$$
$$2 Years of depreciation= $840000*2/7 = \$240000$$$
2 years of Profit after depreciation $${\mathtt{1\,430\,000}}{\mathtt{\,-\,}}{\mathtt{240\,000}} = {\mathtt{1\,190\,000}}$$
2 years worth of tax = $${\mathtt{0.3}}{\mathtt{\,\times\,}}{\mathtt{1\,190\,000}} = {\mathtt{357\,000}}$$
2 years of profit after tax = $${\mathtt{1\,190\,000}}{\mathtt{\,-\,}}{\mathtt{357\,000}} = {\mathtt{833\,000}}$$
I have no idea what a 2 year incremental is and I have little idea if any of this is correct or helpful. lol.
+118651 I really do not know what I am talking about but I will play with it.
2 years of Profit before tax not including initial outlay.
$${\mathtt{90\,000}}{\mathtt{\,\times\,}}\left({\mathtt{35}}{\mathtt{\,\times\,}}{\mathtt{2}}{\mathtt{\,-\,}}{\mathtt{22}}{\mathtt{\,\times\,}}{\mathtt{2}}\right){\mathtt{\,-\,}}{\mathtt{400\,000}}{\mathtt{\,\times\,}}{\mathtt{2}}{\mathtt{\,-\,}}{\mathtt{55\,000}}{\mathtt{\,\times\,}}{\mathtt{2}} = {\mathtt{1\,430\,000}}$$
$$2 Years of depreciation= $840000*2/7 = \$240000$$$
2 years of Profit after depreciation $${\mathtt{1\,430\,000}}{\mathtt{\,-\,}}{\mathtt{240\,000}} = {\mathtt{1\,190\,000}}$$
2 years worth of tax = $${\mathtt{0.3}}{\mathtt{\,\times\,}}{\mathtt{1\,190\,000}} = {\mathtt{357\,000}}$$
2 years of profit after tax = $${\mathtt{1\,190\,000}}{\mathtt{\,-\,}}{\mathtt{357\,000}} = {\mathtt{833\,000}}$$
I have no idea what a 2 year incremental is and I have little idea if any of this is correct or helpful. lol.
