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A business expects the following revenues, cash expenses, and depreciation charg

ID: 2623061 • Letter: A

Question

A business expects the following revenues, cash expenses, and depreciation charges in the future:

Year                                                                                      1                     2                                             

Revenues                                                                         $98,000        $106,000                             

Cost of goods sold                                                        $38,000        $ 49,000                              

Selling expenses                                                            $11,000        $ 13,000

Other cash operating expenses                                 $10,000        $ 11,000                              

Depreciation                                                                  $ 9,500         $ 13,500                              

This business is in the 20 percent tax bracket. Please compute the after-tax cash flows from operations for this investment for each of the years.

After tax operating cash flow for Year 1___$33,100___ Year 2____$29,100__

Use the information above the answer the question below:

In addition to the estimates above the business needs 4 percent of revenues as a cash balance, 11 percent of the cost of goods sold as an inventory balance, 6 percent of the cost of goods sold as an accounts payable balance, and 5 percent of revenues as accrued expenses balance. All of these balances would be needed at the beginning of each year and are estimated from the year-end annual estimates of revenues and cash expenses given above. The business will end at the end of year 2 and all working capital balances will be collected (or realized) at their face value. Please calculate the incremental investment in working capital needed for years 0,1,and 2, and then recalculate the cash flows for the Lansing store investment.

Incremental investment in working capital Year 0___________Year 1___________ Year 2____________

Recalculated cash flows from operations Year 0___________Year 1___________ Year 2____________

Explanation / Answer

Particulars

Year-1

Year-2

Revenues

98000

106000

Less:- Cost of goods sold

(38000)

(49000)

Gross profit

60000

57000

Less:- Other cash operating expenses

(10000)

(11000)

Less:- Selling expenses

(11000)

(13000)

Less:- Depreciation

(9500)

(13500)

Profit before tax

29500

19500

Less:- Tax @ 20%

(5900)

(3900)

After tax

23600

15600

Add:- Depreciation

9500

13500

After tax operating cash flows

33100

29100

Increase in working capital = Increase in cash + Increase in inventory

Particulars

Year-1

Year-2

Revenues

98000

106000

Less:- Cost of goods sold

(38000)

(49000)

Gross profit

60000

57000

Less:- Other cash operating expenses

(10000)

(11000)

Less:- Selling expenses

(11000)

(13000)

Less:- Depreciation

(9500)

(13500)

Profit before tax

29500

19500

Less:- Tax @ 20%

(5900)

(3900)

After tax

23600

15600

Add:- Depreciation

9500

13500

After tax operating cash flows

33100

29100

Increase in working capital = Increase in cash + Increase in inventory