Your firm is considering an overseas expansion. Below is the information that yo

Question

Your firm is considering an overseas expansion. Below is the information that you have been given regarding the project: Initial Equipment Cost: $100m. Life of System: 5 years. Depreciation method: Straight line Depreciation. Expected overseas sales: $110m per year. Raw materials: $75m per year. Salaries for new workers: $25m per year. Net Working Capital necessary for plant to operate effectively: $25m (assume that this investment is required at the start of the project and is recovered when the plant shuts down after 5 years.) Marginal Tax Rate on income and capital gains: 30% Expected salvage value of equipment after 5 years: $30m. What will be the cash flows of this project in millions?

Explanation / Answer

Initial Cash Outflow:

Cost of equipment -$100m

Net Working Capital -$25m

-$125m

Operating Cashflows:

Depreciation = (Cost - Salvage Value) / Useful life = ($100m - $30m) / 5 = $14m

Terminal Cash Flows:

Salvage Value after tax = $30m (1-0.30) = $21m

Net working capital recovery = $25m

Terminal Cash Flows $46m

Cash flows:

Particulars Amount sales $110m Less: Raw material -$75m Less: Salaries -$25m Less: Depreciation $14m Net Profit -$4m Less: Taxes -$1.2m Net Profit after taxes -$5.2m Add: Depreciation $14m Cash Flow After Tax $8.8m

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