Question

3:05 LTE E < Back Ch_9_Student Outline.docx ch c. What is the terminal cash flow in Year 10 is what is the annual after-tax cash flow in Year 10 plus any additional cash flows associated with termination of the project)? Example 5: Breez Scooters wants to place its electric scooters for rent in Waco. The Chief Marketing Officer made a trip to Waco to scout out the territory, spending S4,000 on travel, hotel and meals with the mayor and city council. Based on his report, Breez has decided to move forward. Brecz estimates the following for the project: Purchase of 100 scooters $20,000 Purchase and Installation of charging stations Legal fees to local outside counsel for permit Internal Cost to add Waco info to Breez app by existing Breez IT starr S10,000 $100,000 $35.000 Breez's experience is that a 100-scooter fleet generates $880,000 of rental income per year. Hiring contractors to collect and maintain the scooters costs $120,000 per year. Maintenance, replacement costs for the scooters and charging stations, space leases for charging stations, local advertising sales tax and insurance averages 60% of rental income. The scooters have a short enough life that they are expensed and not depreciated. The changing stations are depreciated over 5 years, Bree's permit to offer the service expires in 4 years, if not renewed by the city council. At the end of 4 years Breez estimates the charging station equipment will be worth $5.000 and they will have to pay $25,000 to collect all scooters and restore the sites of the charging stations to their original condition. The tax rate is 21% a. What is the initial cost associated with this project? b. What are the annual after-tax cash flows associated with this project for years through 3? c. What is the terminal cash flow in Year 4 (ie, what is the annual after-tax cash flow in Year 4 plus any additional cash flows associated with termination of the project)? A Dashboard Calendar To Do Notifications inbox

Answer 1

a)	Initial cost of the project			=	Cost of scooters+cost of Charging stations+Legal fees + Internal cost
				=	$20,000+$100,000+$35,000+$10,000
				=	$165,000.00
	*The expense of $4,000 to scout out on travel,hotel & meal is sunk cost because it had already been incurred.It has no relevance whther we undertake the project or not.
b)	Calculation of depreciation
		Sccoter		=	NO depreciation since it has been expensed in the year of purchase
		Charging stations		=	Cost/no.of years
				=	$100,000/5
				=	$20,000
	Caalculation of Aftertax cashflow for year 1 to 3
	A)	Rental income		=	$880,000.00
	B)	Expenses(maintenance,replacement cost etc.) [A*60%]		=	$528,000.00
	C)	Payment to contractors		=	$120,000.00
	D)	Depreciation		=	$20,000.00
	E)	Net Profit (A-B-C-D)		=	$212,000.00
	F)	Tax (E*21%)		=	$44,520.00
	G)	Net profit after tax (E-F)		=	$167,480.00
	H)	Cash flow after tax (G+D)		=	$187,480.00
c)	Terminal cashflow (before tax)
	A)	Realisable value of charging stations		=	$5,000
		Book value of charging stations (initail cost- depreciation for 4 years)		=	$100,000-($20,000*4)
				=	$20,000
		Tax saving on loss		=	(book value - realisable value)*tax rate
				=	($20,000-$5,000)*21%
				=	$3,150
		Total realisable value after tax (cash inflow)		=	Realisable value + tax saving
				=	$5,000+$3150
				=	$8,150.00
	B)	Cost of collection & Restoration		=	$25,000
		Tax saving on above expense		=	Expense * tax rate
				=	$25,000*21%
				=	$5,250.00
		Net cost after tax (cash outflow)		=	$25,000-$5,250
				=	$        19,750.00
	Terminal cashflow (after tax))			=	Net realisable value (A) - net cost of collection & restoration after tax (B)
				=	$8150-$19750
				=	($11,600)
	Regular cashflow after tax in year 4 (regularcashflow will be same in all 4years)
				=	$187,480
	Net cashflow after tax			=	Regular cashflow after tax+terminal cashflow after tax
				=	$187480+ (-11600)
				=	$175,880
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