Cash Flow Statement

Essay by roxysweetpeaUniversity, Bachelor'sA, November 2007

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1.Prepare a statement showing the incremental cash flows for this project over an 8-year period.

I = \$1,000,000-Working Capital: WC = \$200,000Yi is: ChWCi = Previous Year WC - Current WC = 0 (i=1 to 7)andChWC0 = -\$200,000The working capital is recovered so for the end of the year 8 it will be zero or: ChWC8 = \$200,000-Depreciation: For the first five years Yi (i = 1 to 5):Di = (Invest in plant and equipment) / 5 = \$1,000,000/5 = \$200,000For the years 6 to 8 the depreciation will be zero.

-Revenues:First year the expected revenues will be:R1 = \$900,000For the years Yi (i=2 to 8)Ri = \$1,500,000-Expenses:For all years we will have indirect incremental costs of \$80,000For each year the direct costs are 0.55*RiFor each year Yi (i=1 to 8):Ei = \$80,000 + 0.55*Ri then:E1 = \$80,000 + 0.55*\$950,000 = \$602,500For i=2 to 8:Ei = \$80,000 + 0.55*\$1,500,000

= \$905,000-Taxes:The firm's marginal tax rate is 35%, taxes will be:Ti = T * (Ri - Ei - Di) with T = 0.35 (i=1 to 8)T1 = 0.35*(\$950,000-\$602500-\$200,000) = \$51625For i=2 to 5Ti = 0.35*(\$1,500,000-\$905,000-\$200,000) = \$138250For i=6 to 8Ti = 0.35*(\$1,500,000-\$905,000-\$0) = \$208250Year Sales Direct Cost Indirect Cost Depreciation Tax saved Cash Flow0 -1,200,000 -1,200,0001 950,000 522,500 80,000 200,000 70,000 236,5002 1,500,000 825,000 80,000 200,000 70,000 385,0003 1,500,000 825,000 80,000 200,000 70,000 385,0004 1,500,000 825,000 80,000 200,000 70,000 385,0005 1,500,000 825,000 80,000 200,000 70,000 385,0006 1,500,000 825,000 80,000 357,0007 1,500,000 825,000 80,000 357,0008 1,700,000 825,000 80,000 477,0002. Calculate the Payback Period (P/B) and the NPV for the project.

The payback period is how long it will take for a project to get its initial investment back.

Y= year for full recovery of total investment or TIU = Unrecovered costsCFI CF yearPB = Payback = y + u/cfiThe TI...