The Clumsy Corp are planning to implement a new project which has a life span of
ID: 2710332 • Letter: T
Question
The Clumsy Corp are planning to implement a new project which has a life span of three years. To this end they have to invest in a new machine which costs 30K$, and which has a useful life of 3 years, and depreciates linearly. Other installation and start-up costs for this project add up to 9000$. However CLUMSY are also given a one-time tax incentive equal to 10% of the cost of the machine. After 3 years, the net disposal value of the machine is expected to generate annual cash inflows of respectively 50K$, 75K$, and 100K$, and cash outflows of respectively 10K$, 15K$ and 20K$ for three years. Required: If the marginal corporate tax rate for this project is 30% for incomes below 50K$ pa, and 40% for incomes exceeding 50K$ pa; calculate a)CFAT for the initial phase b)CFAT for each year of the operational phase c)CFAT for the termination phase d)Total revenue expected from this project.
Explanation / Answer
Answer:a) CFAT for the intial phase:
Calculation of the cost of machine:
Investment in new machine=$30000
Other installation and start-up costs =$9000
Total cost of machine=$39000
CFAT for the intial phase=($39000*0.90)=$35100
Answer:b) CFAT for each year of the operational phase
Answer:c) CFAT for the termination phase
13000*0.30=3900
Answer:d) Total revenue expected from this project.
Particulars 1 2 3 Cash inflow 50000 75000 100000 Cash outflow 10000 15000 20000 Net cash inflow 40000 60000 80000 Less: Tax 12000 30000 40000 CFAT 28000 30000 40000