Question

2.2 A chemical processing firm is planning on adding a duplicate polyethylene plant at another location. The financial information for the first project year is shown in Table P2.2. (a) Compute the working-capital requirement during the project period. (b) What is the taxable income during the project period? (c) What is the net income during the project period? (d) Compute the net cash flow from the project during the first year.

Answer 1

A	NEW WORKING CAPITAL REQUIREMENT
	INCREASE IN INVENTORIES		100000
	DECREASE IN ACCOUNTS RECEIVABLE		-20000
	INCREASE IN WAGES PAYABLE		-30000
	DECREASE IN NOTES PAYABLE		40000
	WORKING CAPITAL REQUIRED		90000
B
	SALES		1,500,000.00
	MANUFACTURING COSTS
		DIRECT MATERIALS	150,000.00
		DIRECT LABOUR	200,000.00
		OVERHEAD	100,000.00
		DEPRECIATION	200,000.00
	OPERATING EXPENSES		150,000.00
	EBIT		700,000.00
	INTEREST PAYMENT ON FINANCING		20,000.00
	EBT		680,000.00
C
	EBT		680,000.00
	INCOME TAX		272,000.00
	NET INCOME		408,000.00
D	NET CASH FLOW
	EBIT		700,000.00
	ADD: DEPRECIATION		200,000.00
	EARNING BEFORE DEPRECIATION		900,000.00
	LESS INCREASE IN INVENTORIES		(100,000.00)
	ADD DECREASE IN ACCOUNTS RECEIVABLE		20,000.00
	ADD INCREASE IN WAGES PAYABLE		30,000.00
	LESS DECREASE IN NOTES PAYABLE		(40,000.00)
	LESS EQUIPMENT PURCHASE		(400,000.00)
	ADD BORROWING TO FINANCE EQUIPMENT		200,000.00
	LESS: INTEREST PAYMENT ON FINANCING		(20,000.00)
	NET CASH FLOW		1,490,000.00