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Pierre Wineries is evaluating a project that would require an initial investment in equipment of 580.000 and that is expected
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Answer #1

Answer : Correct option is Option C $37,000 (plus or minus 100)

Calculation of X + Y

Value of X is the relevant operating Cash Flow for year 1

Annual Revenue (A) Given 45000
Annual Cost (B) Given 30000
Depreciation for Year 1 @40% on Cost (C) 80000 * 40% 32000
Earning Before Taxes (D) = (A) - (B) - (C) (17000)
Saving of taxes due to losses (E) 17000 * 50% 8500
Earning After Taxes (F) = (D) + (E) (8500)
Depreciation (Being Non cash Item) (C) 32000
Relevant Operating Cash Flow (F) + (C) 23500

Value of Y ie the relevant operating Cash Flow for year 3

Annual Revenue (A) Given 45000
Annual Cost (B) Given 30000
Depreciation for Year 3 @15% on Cost (C) 80000 * 15% 12000
Earning Before Taxes (D) = (A) - (B) - (C) 3000
Taxes (E) 3000 * 50% 1500
Earning After Taxes (F) = (D) - (E) 1500
Depreciation (Being Non cash Item) (C) 12000
Relevant Operating Cash Flow (F) + (C) 13500

Value of X + Y = 23500 + 13500

= 37,000

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