Answer:
(i) $5,200,000
(ii) $4,000,000
(iii) $5,300,000
Explanation:
(a) Profits before tax:
= Sales - costs - Depreciation
= $20 - $14 - $4
= $2 million
Net operating income = Profits before tax - Tax @40%
= $2,000,000 - $800,000
= $1,200,000
Project's cash flow for the first year:
= Net operating income + Depreciation
= $1,200,000 + $4,000,000
= $5,200,000
(b) Profits before tax:
= Sales - costs - Depreciation
= $20 - $14 - $4
= $2 million
Operating cash flows year:
= Profits before tax - Cannibalize effect + Depreciation
= $2,000,000 - $2,000,000 + $4,000,000
= $4,000,000
(c) Profits before tax:
= Sales - costs - Depreciation
= $20 - $14 - $4
= $2 million
Net operating income = Profits before tax - Tax @35%
= $2,000,000 - $700,000
= $1,300,000
Operating cash flows year:
= Net operating income + Depreciation
= $1,300,000 + $4,000,000
= $5,300,000
Operating cash flows will increase by $100,000.
