Vandelay Industries is considering a new project with a 4-year life with the fol

Question

Vandelay Industries is considering a new project with a 4-year life with the following cost and revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the simplified straight-line method and has no salvage value. This new project will generate additional sales revenue of $112,000 while additional operating costs, excluding depreciation, will be $68,000. Vandelay's marginal tax rate is 35 percent. What is the project's free cash flow in year 1?

Explanation / Answer

Sales-Costs $    44,000.00 Less: Depreciation $    35,000.00 Profit before tax $      9,000.00 Less: Tax@35% $      3,150.00 Profit after tax $      5,850.00 Add: Depreciation $    35,000.00 Free cash flows in year 1 $    40,850.00

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