- Why are interest charges not deducted when a project’s cash flows are calculated for use in a capital budgeting analysis?
- Taylor Inc., the company you work for, is considering a new project whose data are shown below. What is the project’s Year 1 Net Operating Cash Flow?
| Sales revenues, each year | $62,500 |
| Depreciation | $8,000 |
| Other operating costs | $25,000 |
| Interest expense | $8,000 |
| Tax rate | 35.0% |
| Net Operating CF =EBIT * (1-Tax) +Dep |
| EBIT = Sales – Costs – Dep |
- Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project’s 10-year expected life. What is the project’s Year 1 Net Operating Cash Flow?
| Equipment cost (depreciable basis) | $65,000 |
| Sales revenues, each year | $60,000 |
| Operating costs (excl. deprec.) | $25,000 |
| Tax rate | 35.0% |
| Net Operating CF =EBIT * (1-Tax) +Dep |
| EBIT = Sales – Costs – Dep |
4) Kasper Film Co. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment’s after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment’s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
