A marketing research firm with annual cash inflows of $ 800 does not expect any

Question

A marketing research firm with annual cash inflows of $800 does not expect any growth in annual cash inflows over the next two years. The company, however, anticipates that annual cash outflows, currently at $160 will increase to $230 in year 1 and to $270 in year 2. Assuming the tax rate of 38%, determine the firm's cash flow in YEAR TWO. Assume straight line depreciation of $50.

A poster manufacturer wants to introduce a small size line of movie, concert, and theater posters. To do so, however, requires new equipment, additional personnel, and increased advertising expenses. The equipment costs $400 will be depreciated in a straight line basis for 4 years. This new line is expected to produce annual cash inflows of $800 in each year over the life of the project. The new line is expected to produce annual cash outflows of $330 in each year over the life of the project. If the tax rate is 34% and the required rate of return is 5%, what is the project's NPV?

Explanation / Answer

Problem 1

Cashflow in year 2 = (cash inflows - cash outflows - depreciation)*(1-tax rate) + depreciation = (800-270-50)*(1-38%) + 50 = $ 347.6

Problem 2

Annual depreciation = 400/4 = 100

Annual cashflow = (cash inflows - cash outflows - depreciation)*(1-tax rate) + depreciation = (800-330-100)*(1-34%)+100 = 344.2

NPV = -400 + 344.2/(1+5%)^1 + 344.2/(1+5%)^2 + 344.2/(1+5%)^3 + 344.2/(1+5%)^4 = $ 820.52

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