Question

JG Corporation, a firm with a 30% corporate tax rate and a 15% cost of capital, is considering a new project. The project involves the introduction of a new high-efficient solar panel. The project is expected to last 5 years. You have been given the following information:

Cost of new plant and equipment	$22 million (investment today, year zero)
Depreciation	New plant and equipment is depreciated from a $22 million starting value to an end book value in year 5 of $2 million using straight-line method over 5 years (year 1 to year 5).
Salvage value	Plant and equipment will be sold for $4 million at the end of the project (year 5).

Revenue and costs are provided in the following table (end of year numbers, in million $):

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	0	30	60	90	120	20
Costs	0	16	31	46	61	11
NWC	1	3	6	9	12	0

What is the Net Cash flow in 1 YEAR? 5 Years?

Answer 1

Cost of machinery	22,000,000		Salvage value	4,000,000
Ending Book Value	2,000,000		Less: Book Value	2,000,000
Depreciable value	20,000,000		Capital Gain	2,000,000
Life	÷ 5		tax at 30%	600,000
Depreciation per year	4,000,000		salvage value after tax	3,400,000	(4M - 0.6M)
Depreciation tax saving per year	$        1,200,000
(4000000 x 30%)
Given:	Year 1			Given:	Year 5
Sales	30,000,000			Sales	20,000,000
Costs	16,000,000			Costs	11,000,000
Sales less costs	14,000,000			Sales less costs	9,000,000
Tax at 30%	4,200,000			Tax at 30%	2,700,000
EAT	9,800,000	(14M-4.2M)		EAT	6,300,000	(9M-2.7M)
Add: Depreciation tax savings	1,200,000			Add: Depreciation tax savings	1,200,000
ocf	11,000,000	(9.8M + 1.2M)		ocf	7,500,000	(6.3M + 1.2M)
Less: Change in NWC	2,000,000			Add: recovery of NWC	12,000,000
Net cash flow	9,000,000	(11M - 2M)		Add: SV after tax	3,400,000
				Net cash flow	22,900,000	(7.5M+12M+3.4M)