Question

Table 1

Year	MACRS	Depreciation	Book Value
1	33%	221,100	448,900
2	45	301,500	147,400
3	15	100,500	46,900
4	7	46,900	0
	100	670,000

See years 1 and 4 as examples in Table 1. In year 1, 3 X 425,000 = 1,275,000 – 637,500 – 221,100 – 20,000 = 396,400 – 158,560 = 237,840 + 221,100 = 458,940 = project NCF = after tax, end-of-year cash inflows, CFt. In year 4, 3 X 425,000 = 1,275,000 – 637,500 – 46,900 – 20,000 = 570,600 – 228,240 = 342,360 + 46,900 = 389,260.

Should the project be undertaken? Fill in X's  

	Y 0	Y 1	Y 2	Y 3	Y 4
Unit Price		$3	X	X	$3
Unit Sales		425,000	x	x	425,000
Revenues		1,275,000	X	X	1,275,000
Operating Costs		637,500	X	X	637,500
Depreciation		221,100	X	X	46,900
Other Project Effects		20,000	X	X	20,000
Before tax income		396,400	X	X	570,600
Taxes		158,560	X	X	228,240
Net Income		237,840	X	X	342,360
Plus Depreciation		221,100	X	X	46,900
Net Op Cash Flow		458,940	X	X	389,260
Salvage Value					100,000
SV Tax					X
Recovery of NWC					X
Termination CF					X
Project NCF	X	X	X	X	X

Answer 1

Particualrs	Year 1	Year 2	Year 3	Year 4
Unit price	3	3	3	3
Unit sales	425000	425000	425000	425000
Revenue	1275000	1275000	1275000	1275000
Opearting costs	637500	637500	637500	637500
Depreciation	221100	301500	100500	46900
Other project effect	20000	20000	20000	20000
Before tax income	396400	316000	517000	570600
Tax @ 40%(158560/396400)	158560	126400	206800	228240
Income after tax before depreciation added back	237840	189600	310200	342360
Net income (after deprn added back)	458940	491100	410700	389260
Add salvage value at the end after tax@40%(100000*60%)				60000
Projected cash flow	458940	491100	410700	449260
Total cash inflow	1810000
Total cash outflow	670000
Net cashflow	1140000

Conclusion : Since net cash flow is possitive it is better to accept this proposal