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Homework answers / question archive / Laurel's Lawn Care, Ltd
Laurel's Lawn Care, Ltd., has a new mower line that can generate revenues of $120,000 per year. Direct production costs are $40,000 and the fixed costs of maintaining the lawn mower factory are $15,000 a year. The factory originally cost $1 million and is included in an asset class with a CCA rate of 5%. Calculate the operating cash flows of the project for the next 6 years if the firm's tax bracket is 35%. CCA (5%) End of Year Year (Depreciation) UCC 1 $1,000,000 $25,000 $975,000 UCC 2 48,750 926,250 975,000 926,250 3 46,313 879,937 879,937 43.997 835,940 5 835,940 41.797 794.143 794,143 39,707 754,436
Answer : Below is the table showing Operating Cash Flows given the following depreciation schedule:
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | |
| Initial Investment | -1000000 | ||||||
| Annual Sales Revenue | 120000 | 120000 | 120000 | 120000 | 120000 | 120000 | |
| Cash Operating Cost | -40000 | -40000 | -40000 | -40000 | -40000 | -40000 | |
| Less : Depreciation | -25000 | -48750 | -46313 | -43997 | -41797 | -39707 | |
| Earning before taxes | 55000 | 31250 | 33687 | 36003 | 38203 | 40293 | |
| Taxes @ 30% | -19250 | -10938 | -11790 | -12601 | -13371 | -14103 | |
| Incremental Net Income | 35750 | 20313 | 21897 | 23402 | 24832 | 26190 | |
| Add : Depreciation | 25000 | 48750 | 46313 | 43997 | 41797 | 39707 | |
| Operating Cash Flows | -1000000 | 60750 | 69063 | 68210 | 67399 | 66629 | 65897 |
UCC is the unrecovered capital Cost .It basically is the closing value of Asset.It is calculated as Opening Value - Depreciation.
For example as Cost of Asset is 1000000
CCA depreciation for year 1 at half year rate = 1000000 * 5% / 2 = 25000
Closing UCC = 1,000,000 - 25000 = 975,000
For year2
Bginning UCC = 975000
Depreciation at full rate = 975000 * 5% = 48750
Closing UCC = 975000 - 48750 = 926250
and so on as showin in table.
