Answer:
a.$700,000
b.$400,000
c.$650,000
Explanation:
Net Income = (Sales - Operating expense - Depreciation - Interest expense) x (1 - tax rate)
Sales is $5,000,000
operating expense is $3,500,000
depreciation is $1,000,000
interest expense is $1,000,000
tax rate is 40%=0.40
net income=(5000,000-3500,000-1,000,000-1000,000)*(1-0.4)
net income=-$300,000
Cash flow =net income +depreciation
cash flow=-$300,000+$1000,000
cash flow=$700,000
if the project cannibalize at $500,000 net income would be:
net income=(5000,000-3500,000-1,000,000-1000,000-500,000)*(1-0.4)
net income=-$600,000
cash flow=-$600,000+$1,000,000
cash flow is $400,000
Ignoring part b, a reduction in tax to 30% would impact thus:
net income=(5000,000-3500,000-1,000,000-1000,000)*(1-0.3)
net income=-$350,000
Cash flow =-$350,000+$1000,000
cash flow is $650,000
