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A firm is planning to start a new project. The firm spent $45,000 on a market...

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Finance

A firm is planning to start a new project. The firm spent$45,000 on a market study and $30,000 on consulting three monthsago. If the firm starts the project, it will spend $600,000 for newmachinery, $50,000 for installation, and $20,000 for shipping. Themachine will be depreciated via the 5-year MACRS depreciationmethod (20.00%, 32.00%, 17.20%, 11.50%, 11.50%, and 5.8%,respectively, from Year 1 to Year 6). The expected sales increasefrom this new project is $450,000 a year, and the expectedincremental expenses are $180,000 a year. In order to start thisnew project, the company has to invest $100,000 in working capital.The marginal tax rate is 34%. What is the incremental cash flow ofthis project in Year 2?

A)$220,013

B)$217,382

C)$102,142

D)$224,107

Answer & Explanation Solved by verified expert
4.3 Ratings (753 Votes)

Calculation of cash flow-

Year Sales increase Incremental expenses Depreciation Taxable income Tax @34% Income after tax Cash flow
1 450000 180000 134000 136000 46240 89760 223760
2 450000 180000 214400 55600 18904 36696 251096
3 450000 180000 115240 154760 52618.4 102141.6 217381.6
4 450000 180000 77050 192950 65603 127347 204397
5 450000 180000 77050 192950 65603 127347 204397
6 450000 180000 38860 231140 78587.6 152552.4 191412.4

Note1 - cash flow has been calculated after adding back depreciation in the income after tax.

Incremental cash flow of this project in year 2 is $217382, so the correct option is B.

Calculation of depereciation-

Year Cost of Machine Depreciation rate Depreciation amount
1 670000 20 134000
2 670000 32 214400
3 670000 17.2 115240
4 670000 11.5 77050
5 670000 11.5 77050
6 670000 5.8 38860

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