An analyst gathered the following ifnormation related to the annual expected cash flows for a proposed expansion project: Revenue 420k Labor and material costs 120K Depreciation 40k Tax rate 40% The company plans to use a building that is has owned for serveral yehars to accomodate the equipment needed for the expansion project, the company estimates that the building could be rented to another firm for 30K a year if it is not used for the expansion project. the rental income is not included in any of the information gathered by the analyst To determine the project’s net present value,t he amount of annual net operating cahs flow for th eexpansion is closest to: A.156k B.178k C.148k D.206k I got 138k unfortunatley!
(420-120-40)*.6 = 156 Add back depreciation 40 gives you 196 30K is an opportunity cost which needs to be taken out after tax because it could have been used elsewhere. so 196 - (30 * .6) = 178K Choice B Is that the right answer? CP
(420-120-40)*.6 optional rent isn’t considered in tandem with using the building A ah sh*t…turkey has done me in for the night
I guess a B Im getting 180K
Hi CPK, Why would we consider opportunity cost in this case since it does not come under CAsh flows
Opportunity costs should be considered in cash flows calculation. Sunk costs should not be. CP
CP: opportunity cost is tax deductible or should be treated like principle payment?
In this case, my assumption was that it should have reduced the 420K to start with. so I took of 18K at the end.
I would choose B also. Opportunity cost is a cost of the project. It’s revenue being given up for the sake of this project. 420 Rev - 120 Cost - 40 Depreciation - 30 Opportunity cost ===== 230 Pretax income - 92 Tax ===== 138 NI + 40 Add back depreciation ===== 178 Annual CF
yes, the answer is B. I forgot to add back the depreciation. good work, everyone.