Fairfax Paint operates stores in Virginia. The firm is evaluating the Vienna pro
ID: 2757224 • Letter: F
Question
Fairfax Paint operates stores in Virginia. The firm is evaluating the Vienna project, which would involve opening a new store in Vienna. During year 1, Fairfax Paint would have total revenue of 316,000 dollars and total costs of 268,000 dollars if it pursues the Vienna project, and the firm would have total revenue of 252,000 dollars and total costs of 297,000 if it does not pursue the Vienna project. Depreciation taken by the firm would be 62,000 dollars if the firm pursues the project and 43,000 dollars if the firm does not pursue the project. The tax rate is 45 percent. What is the relevant operating cash flow (OCF) for year 1 of the Vienna project that Fairfax Paint should use in its NPV analysis of the Vienna project?
Explanation / Answer
Net Present Value of Project= Net Present Value of Cash Inflows from the Project - Net present value of Initial Investment
We will take two alternatives seperately and try to compare the two things
Initial Investment take this some constant. say it is 0 for both, just for Our convenience
Tax Rate is same for both the projects
Note: Here if Viennna project is not pursued, there is an operating loss, And thus we do not have any tax in that case.
Thus as the Question asked:
Operating Cash Flows if Vienna Project is pursued = 88400
and OCP if Vienna project is not pursued = (2000)
Particulars If Vienna Project is Pursued Vienna project not pursued Total Revenue for the Year 316000 252000 Less: Total Cost ofthe year 268000 297000 Operating Profits for the year 48000 (45000) Less: Taxes on Profits@45% 21600 0 Profits after Tax 26400 (45000) Add: Depretiation(Non Cash) 62000 43000 Operating Cas flows after Tax 88400 (2000)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.