Swindler Ltd has completed a feasibility study costing $16769 to determine if there is any benefit in purchasing a new asset. The machine will cost $318900 and an additional $14152 will need to spent to have the machine in operational state. Before the machine can be used staff must be trained at a further cost of $9602.
The project is expected to last for 5 years and the Taxation Office has confirmed this. At the end of the project the machine will be fully depreciated.
Initial advertising costs are expected to $20571 and additional stock of $68525 will be needed. Wages will change from $85000 to $39495 and Fixed Costs will remain at $59609.
The new machine is expected to produce sales of $1125787 in the first year and will grow by 10% each year of the project. Material costs will be 24% of sales in each year.
You are required to calculate the net cash flow (round to the nearest dollar and DO NOT include $ sign) that would appear in Year 1 of a Capital Budget.
Assume the Australian Company tax Rate applies.
NET CASH FLOW In YEAR 1 | |||||
Cash Flows: | |||||
Sales Revenue from new machine | 1125787 | ||||
Material Cost (24%) | -270189 | (1125787*24%) | |||
Initial advertising cost | -20571 | ||||
Training cost | -9602 | ||||
Increase in wages | -45505 | (85000-39495) | |||
Increase in fixed costs | 0 | ||||
Depreciation expense | -66610 | (318900+14152)/5 | |||
SUM | 713310 | ||||
Before tax incremental profit | 713310 | ||||
Tax expense(30%) | 213993 | (713310*30%) | |||
Operating profit after tax | 499317 | (713310-213993) | |||
Add Depreciation (no tax expense) | 66610 | ||||
Net Cash Flow in Year 1 | 565927 | (499317+66610) | |||
NOTE: | |||||
Initial investment in machine | 333052 | (318900+14152) | |||
Useful Life in years | 5 | ||||
Annual depreciation rate =(100/5)% | 20% | ||||
Annual depreciation | 66610 | (333052*20% | |||
Feasibility study cost is sunk cost and not a relevant cost | |||||
Additional stock is part of initial investment in working capital in year 0 | |||||
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