The Arva Logging Company is considering a new logging project in Ontario, requir

Question

The Arva Logging Company is considering a new logging project in Ontario, requiring new equipment with a cost of $280,000. For the upcoming year, they estimate that the project will produce sales of $650,000 and $490,000 in operating costs. The CCA rate will be 25 percent and their net profits will be taxed at a corporate rate of 38 percent. Use the top-down approach and the tax shield approach to calculate the operating cash flow for the first year of the project for the Arva Logging Company.

The Arva Logging Company is considering a new logging project in Ontario, requiring new equipment with a cost of $280,000. For the upcoming year, they estimate that the project will produce sales of $650,000 and $490,000 in operating costs. The CCA rate will be 25 percent and their net profits will be taxed at a corporate rate of 38 percent. Use the top-down approach and the tax shield approach to calculate the operating cash flow for the first year of the project for the Arva Logging Company.

Explanation / Answer

Depreciation = $280,000 *0.25 = $70,000

According to the top down approach:

OCF = (S –C) –(S –C –D) *T

= ($650,000 –$490,000) –(650,000 –$490,000 –$70,000) *0.38 = $125,800

According to the tax shield approach:

OCF = (S –C)(1 –T) + TD

= ($650,000 –$490,000) *(1 –0.38) + (0.38 *$70,000) = $125,800

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