194) Olson Industries needs to add a small plant to accommodate a special contract to supply building materials over a five year period. The required initial cash outlays at Time 0 are as follows.
New building 2,000,000
Olson uses straight-line depreciation for tax purposes and will depreciate the building over 10 years and the equipment over 5 years. Olson’s effective tax rate is 40%.
Revenues from the special contract are estimated at $1.2 million annually and cash expenses are estimated at $300,000 annually. At the end of the fifth year, the assumed sales values of the land and building are $800,000 and $500,000, respectively. It is further assumed the equipment will be removed at a cost of $50,000 and sold for $300,000.
As Olson utilizes the net present value (NPV) method to analyze investments, the net cash flow for period 5 would be`
can you please explain first point more?
Thank you so much for your help. My mistake was in sale calculation for land and equipment. you cleared it for me. I really appreciate the help.
Explanation for first point
Operating after tax cash flow = 1.2million-300,000= 900,000 ; 900,000 * (1-.4)= 540,000
Depreciation : Building = 2million/10= 200,000
Equipment=3millon/5 = 600,000
Depre Tax shield = 200,000+600,000 = 800,000 *.4 = 320,000
Operating net cash inflow = 540,000+320,000 = 860,000
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