Finance solution of given questions
The firm’s cash flow for a new project annually can be calculated by subtracting total variable and fixed expenses from the revenue generated. In this case, variable and fixed expenses are 900,000 which when subtracted from the revenue of 1,800,000 will result in a profit of 900,000. However, before arriving at the final cash flow figure we need to account for depreciation expense as well as taxation charges.
Depreciation is treated as an expense so it should be deducted from the available profits; in this case depreciation expense is increased by 160,000 per year making our revised profit figure 740,000. To calculate tax liability for this amount we must multiply taxable income with applicable tax rate i-e 37% – resulting in a taxation bill of 273 200$. Therefore after deducting taxes from our earlier computed profits figure we obtain 466 800$ as net cash flow.
In conclusion the annual cash flow generated from this new project comes up to 466 800$ which can either be reinvested into business operations or distributed amongst its shareholders based on their expectations. As such calculating accurate cash flows for any projects helps firms better manage their finances and make informed decisions about future investments or divestments.