Sigma industries is considering a new project with a 10 year life with the follo
ID: 2734559 • Letter: S
Question
Sigma industries is considering a new project with a 10 year life with the following cost and revenue data. this project will require an investment of $130000 in new equipment this new equipment will be depreciated down to zero over 10 years using simplified straight line method and has no salvage value. this new project will generate additional sales revenue of 112000 while additional operating costs excluding depreciaton will be $69000. Sigma's marginal tax rate is 32% what is the projects free cash flow in a year 1?
Explanation / Answer
Initial investment
130000
Life (in years)
10
Salvage value
0
Yearly depreciation (130000/10)
13000
Tax rate
32%
Tax saving on yearly depreciation
4160
Additional cash revenue in Year 1
112000
Additional Operatin cost in Year 1
-69000
Net operatiing income
43000
Tax @32%
-13760
Net operatiing income after tax
29240
Tax saving on depreciation
4160
Total net operating income (1)
33400
Capital expenditure (2)
-130000
Free cashflow (1)+(2)
-96600
Initial investment
130000
Life (in years)
10
Salvage value
0
Yearly depreciation (130000/10)
13000
Tax rate
32%
Tax saving on yearly depreciation
4160
Additional cash revenue in Year 1
112000
Additional Operatin cost in Year 1
-69000
Net operatiing income
43000
Tax @32%
-13760
Net operatiing income after tax
29240
Tax saving on depreciation
4160
Total net operating income (1)
33400
Capital expenditure (2)
-130000
Free cashflow (1)+(2)
-96600
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