Question

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2. A chemical processing firm is planning to add a duplicate polyethylene plant at another location. The financial information for the first project year is shown in the table below. (a) Compute the new 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. Financial Information for First Project Year Sales $1,500,000 Manufacturing costs Direct materials $150,000 Direct labour $200,000 Overhead $100,000 Depreciation $200,000 Operating expenses $150,000 Equipment purchase $400,000 Borrowing to finance equipment $200,000 Increase in inventories $100,000 Decrease in accounts receivable $20,000 Increase in wages payable $30,000 Decrease in notes payable $40,000 Income taxes $272,000 Interest payment on financing $20,000

Answer 1

A	NEW WORKING CAPITAL REQUIREMENT DURING THE PROJECT PERIOD
	INCREASE IN INVENTORIES		$            100,000
	DECREASE IN ACCOUNTS REEIVABLE		$            (20,000)
	INCREASE IN WAGES PAYAVLE		$            (30,000)
	DECREASE IN NOTES PAYABLE		$              40,000
	ADDITIONAL WORKING CAPITAL REQUIRED		$              90,000
B		TAXABLE INCOME DURING THE PROJECT PERIOD
	SALES		$        1,500,000
	MANUFACTURING COSTS
		DIRET MATERIALS	$            150,000
		DIRECT LABOUR	$            200,000
		OVERHEAD	$            100,000
		DEPRECIATION	$            200,000
	OPERATING EXPENSES		$            150,000
	INTEREST PAYMENT ON FINANCING		$              20,000
	TOTAL EXPENSES		$            820,000
	INCOME BEFORE TAX		$            680,000
C		NET INCOME DURING THE PROJECT PERIOD
	SALES		$        1,500,000
	MANUFACTURING COSTS
		DIRET MATERIALS	$            150,000
		DIRECT LABOUR	$            200,000
		OVERHEAD	$            100,000
		DEPRECIATION	$            200,000
	OPERATING EXPENSES		$            150,000
	INTEREST PAYMENT ON FINANCING		$              20,000
	TOTAL EXPENSES		$            820,000
	INCOME BEFORE TAX		$            680,000
	INCOME TAX		$            272,000
	NET INCOME		$            408,000
D	NET CASH FLOW
	NET INCOME		408,000
	ADD: DEPRECIATION		200,000
	LESS INCREASE IN INVENTORIES		$         (100,000)
	ADD DECREASE IN ACCOUNTS REEIVABLE		$              20,000
	ADD INCREASE IN WAGES PAYAVLE		$              30,000
	LESS DECREASE IN NOTES PAYABLE		$            (40,000)
	LESS EQUIPMENT PURCHASE		$            400,000
	ADD BORROWING TO FINANCE EQUIPMENT		$            200,000
	NET CASH FLOW		1,118,000