Taylor inc., the company you work for, is considering a new project whose data are shown below. what is the project's year 1 cash flow? sales revenues, each year $62,500 depreciation $8,000 other operating costs $25,000 interest expense $8,000 tax rate 35.0% selected correctb. $27,175 answers:

a. $28,534 correctb. $27,175

c. $25,816

d. $29,960

$27,175

Explanation:

Year 1

Sales                                  $62,500

Depreciation        $8,000

Operating Cost    $25,000

Total Expense                    ($33,000)

Income Before tax              $29,500

Tax 35%                              ($10,325)

Net Income                          $19,175

Interest Expense is not relevant to the project, It is a financing decision which will not be part of project calculation.

As the Net income includes the deduction of non cash item of depreciation. so, it will be added back to calculate the cash flow.

Cash Flow in year 1 = Net Income + Depreciation = $19,175 + $8,000 = $27,175

B) $27,175

Explanation:

future cash flows = [(total sales revenue - other operating costs - depreciation expense) x (1 - tax rate)] + depreciation expense =

= [($62,500 - $25,000 - $8,000) x (1 - 35%)] + $8,000 = $19,175 + $8,000 = $27,175

When you calculate net cash flows, you must first include depreciation expense to determine EBIT. Interest expenses are no included in this calculation, but you must then decrease taxes due. After you have calculated taxes, you must add depreciation expense. Interest expenses are not included because the net cash flow calculates cash flows generated by a project and it doesn't matter where the money came from. Depreciation expenses must be added at the end because they do not represent any cash outflow.

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