Question

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

Answer 1

Answer with working notes and explanation is given below

a) Working Capital requirement Decrease in Accounts Receivable Increase in Inventories -$20,000 $100,000 $80,000 Less: Increases in wages payable Decrease in Notes payable Working capital requirement $30,000 -$40,000 -$10,000 $90,000 Working capital = Current Assets- Current Liabilities Increase in Current Assets and decrease in current liabilities increases working capital Decrease in Current Assets and increase in current liabilities decrease working capital $1,500,000 b) Calculation of Taxable income Sales Less: Cost of goods sold Direct Material Direct Labor Overhead Depreciation Gross profit Less: Operating expenses Profit before interest and tax Less: Interest Profit before tax/Taxable income $150,000 $200,000 $100,000 $200,000 $650,000 $850,000 $150,000 $700,000 $20,000 $680,000 c) Calculation of Net income Profit before tax/Taxable income Less: Taxes paid Net Income $680,000 $272,000 $408,000 $408,000 d) Net Cash flow from the project Net Income Add: Non cash expense Depreciation $200,000 $608,000 -$90,000 $518,000 Increase in Working capital Net cash flow from the project $518,000 Net cash flow at organisation level Net cash flow from the project Cash flow from investing activity Purchase of equipment Cash flow from financing activity Borrowing to finance equipment Net Cash flow at organisation level -$400,000 $200,000 $318,000