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Estimating Cash Flows RIC 2002 (1)

# Estimating Cash Flows RIC 2002 (1) - \$6,367 Salvage for...

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Estimating Cash Flows: Three-Stage Approach for Estimating Cash Flows 1. Initial investment cash flow : - \$12,000 Cost of building (2002) - \$8,000 Cost of Equipment (2002) - \$6,000 Increase in NWC (2002) Total initial investment (2002): \$26,000 2. Annual cash flows during project’s life : Year 1: Year 2: Sales Revenue \$60,000 \$61,200 Operating Costs Variable (42,000) (42,840) Fixed (8,000) (8,080) Total (50,000) (50,920) Depreciation Building (156) (312) Equipment (1,600) (2,560) Total (1,756) (2,872) EBIT 8,244 7,408 Taxes (.40) (3,298) (2,963) Net Income 4,946 4,445 add back depreciation 1,756 2,872 Operating Cash Flow 6,702 7,317 Investment in NWC (120) (122) Total Net Cash Flow \$6,582 \$7,195 Formula: (Revenues – operating costs – depreciation)(1-t) + depreciation –change in NWC

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3. Terminal year cash flows (2006) : Recapture of NWC:
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Unformatted text preview: \$6,367 Salvage for Building: Selling Price \$7,500* Less book value- 10,908 Profit (loss) on sale (3,408) Taxes on profit (loss) (.40)- (1,363)* After-tax salvage value \$8,863 Easy formula for after-tax salvage value: SP - (SP – BV)t \$7,500 – (\$7,500 - \$10,908).40 = \$8,863 Salvage for Equipment: Selling Price \$2,000* Less book value-1,360 Profit (loss) on sale 640 Taxes on profit (loss) (.40)- 256* After-tax salvage value \$1,744 \$2,000 – (.40)(\$2,000 - \$1,360) =\$1,744 Total After-tax salvage value: Building \$8,863 Equipment \$1,744 Total After-tax salvage value \$10,607 Total terminal year cash flow: Recapture of NWC \$6,367 Total After-tax salvage value \$10,607 Total terminal year cash flow \$16,974...
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