Russell\'s of Townville has a proposed project which will generate sales of 4,50
ID: 2648125 • Letter: R
Question
Russell's of Townville has a proposed project which will generate sales of 4,500 units at a selling price of $18 each. The fixed costs are $12,000 and the variable costs per unit are $11. The project requires $48,000 of capital expenditures which will be depreciated on a straight-line basis to a zero book value over the 5-year life of the project. The salvage value of the capital is $6,000 and the tax rate is 35 percent. What is the operating cash flow for year 5?
A. $16,035
B. $16,575
C. $19,935
D. $22,035
E. $22,815
Explanation / Answer
Depreciation on straight line basis = cost of asset/life of the project ( as the asset is depreciated to zero value)
=$48,000/5 = $9,600.
Operating cash flows for year 5:
Salvage value of the capital expenditure is considered as normal gain and hence it is considered as an operational cash flows. Any extraordinary gain would have been considered as Cash flow from investing activities.
Answer is option c.
Assumption is that fixed cost given does not include depreciation.
Particulars Amount Sales $81,000.00 Add: Salvage value of the capital expenditure $6,000.00 Total income (A) $87,000.00 Minus: Variable costs $49,500.00 Fixed costs $12,000.00 Depreciation $9,600.00 Total costs (B) $71,100.00 Net profit before tax (A-B) $15,900.00 Tax @35% $5,565.00 Profit after tax $10,335.00 Add: Depreciation $9,600.00 Operational cash flows $19,935.00Related Questions
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