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1. Schiller Construction Inc. has estimated the following revenues and expenses related to phase I of a proposed new housing development. Incremental sales= $2,000,000, total cash operating expenses $1,200,000, depreciation $300,000, taxes 35%, interest expense, $120,000. What is the operating cash flow associated with phase I of the development?
2. Jefferson Corporation is considering an expansion project. The necessary equipment could be purchased for $10 million and shipping and installation costs are another $200,000. The project will also require an initial $1 million investment in net working capital. The company's tax rate is 37%. What is the project's initial investment outlay?
3. Diamond Inc., has estimated that a new building will cost $1,000,000 to construct. Land was purchased a year ago for $300,000 and could be sold today for $400,000. An environmental impact study was performed at a cost of $50,000. For capital budgeting purposes, what is the relevant cost of the new building?
1) Computation of Operating Cash Flow associated with phase I of the development:
Operating Cash Flow = (Sales - Total Cash Expense - Depreciation)*(1-Tax Rate) + Depreciation
= ($2,000,000-$1,200,000-$300,000)*(1-35%) + $300,000
= $325,000+$300,000
Operating Cash Flow = $625,000
2) Computation of Initial Investment Outlay:
Initial investment Outlay = Cost + Shipping & installation costs + Investment in net working capital
= 10,000,000 + 200,000 + 1,000,000
Initial investment cost = $11,200,000 or $11.2 million
3) Computation of Relevant Cost of New Building:
Cost of New Building = Cost of New Building + Land
= $1,000,000 + $400,000
Cost of New Building = $1,400,000
