Question

From 1986 to the end of 2017, U.S. companies used a slight variation of the double-declining balance method, called Page 149 the modified accelerated cost recovery system (MACRS).8 But the 2017 Tax Cuts and Jobs BEYOND THE PAGE Act offered companies bonus depreciation sufficient to write off 100% of their investment expenditures in the year that they come on line. Table 6.3 recalculates the NPV of the MACRS depreciation sy guano project, assuming that the full $12 million investment can be depreciated stem immediately We initially assumed that the guano project could be depreciated straight-line over six years. This resulted in an NPV of $3.806 million. We then calculated that if IM&C could use the double-declining-balance method, NPV would increase by $212,000 to $4.018 million Finally, Table 6.3 shows that full first-year expensing introduced in the 2017 tax reform would increase NPV further to $4.929 million mhhe.com/brealey13e Table 6.3 IM&C's guano project. Revised analysis with immediate expensing of investment expenditures.

please help and show me how (all)each number was calculated in the TABLE according to problem given. (ex, how pre-tax profit, profit after tax, operating cashflow is being calculated?) if it too much, show as many as you can. thank you so much in advance

Answer 1

Cash flow statement majorly stating whether Company's cash and Cash equivalents will increase or decrease due to different activities. Cash flow statement breaks the analysis down to operating, investing, and financing activities.

Operating Activities: Explains the sources and uses of cash from ongoing regular business activities in a given period. In other words, day to day activities.

Investing Activities: Cash involve in creation a new assets like Fixed Assets, Long term Investments and Interest, dividend income there on etc.,

Financing Activities: Generating the cash by Issuing new shares, debentures, Loans and Interest payable, Dividend expense there on etc.,

Pre- Tax Profit is also called as  Profit before Tax

Revenue XXXX

Less: Cost of goods sold XXX

Other Costs XXX

Depreciation XXX ( XXX )   

Profit before Tax XXX

Less :Tax @ % (Profit *Tax rate) (XX)

Profit after Tax    XXX

Operating Cash Flows :

1. To Profit before tax, add back the Depreciation, because Depreciation is non cash Item

2. Working Capital = Current Assets - Current Liabilities. In Cash Flow point of view, Increases the current Liabilities means increase the Cash Flow. Add to the Profit after Tax and vice versa. In similar way, If Increases Current Assets, outgoing cash, hence decrease from the Profit after Tax and vice versa.

Profit Before Tax XXXX

Adjustment for

Add: Depreciation XXX

Add: Decrease in Working Capital XXX

Add: Loss on sale of asset XX

Adjustment for

Less : Taxes Paid (XX)  

Less: Decrease in Working Capital (XX)

Less: Profit on sale of Asset (XX)

Net Operating Cash Flows XXX

NPV = Present cash flows - Initial Investment

Present cash flows = Total Cash flows * Discount rate of return.

In the above problem Discount rate of return taken @ 20%.

Year Discount rate

1 1/1+20% = 1/1.2 =0.833

2 0.833/1.2 =0.694

3   0.694/1.2 =0.579  

4   0.579/1.2 =0.482

5 0.482/1.2 = 0.402

6 0.402/1.2 = 0.335

7 0.335/1.2 =0.279