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  • Incremental After Tax Operating Cash Flow Each Year For The Life of The Project

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    Carlos Alphonce
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    This document presents the calculation of net present value (NPV) for an investment project with an initial cost of $45 million. It provides the incremental after-tax operating cash flows for 3 years, as well as the inputs used to calculate the cost of equity of 6%. The NPV of the original cash flows is calculated to be $22.19 million. The NPV is recalculated with an increase in after-tax cash flows of $7.5 million for 3 years, resulting in a higher NPV of $36.32 million. Increasing the cash flows makes the project more profitable.

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    This document presents the calculation of net present value (NPV) for an investment project with an initial cost of $45 million. It provides the incremental after-tax operating cash flows for 3 years, as well as the inputs used to calculate the cost of equity of 6%. The NPV of the original cash flows is calculated to be $22.19 million. The NPV is recalculated with an increase in after-tax cash flows of $7.5 million for 3 years, resulting in a higher NPV of $36.32 million. Increasing the cash flows makes the project more profitable.

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    Download as DOCX, PDF, TXT or read online from Scribd
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    3 views1 page

    Incremental After Tax Operating Cash Flow Each Year For The Life of The Project

    Uploaded by

    Carlos Alphonce
    This document presents the calculation of net present value (NPV) for an investment project with an initial cost of $45 million. It provides the incremental after-tax operating cash flows for 3 years, as well as the inputs used to calculate the cost of equity of 6%. The NPV of the original cash flows is calculated to be $22.19 million. The NPV is recalculated with an increase in after-tax cash flows of $7.5 million for 3 years, resulting in a higher NPV of $36.32 million. Increasing the cash flows makes the project more profitable.

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    © All Rights Reserved
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    Incremental after tax operating cash flow each year for the life of the project

    Market beta=1.5, debt to equity ratio= 0.5, tax rate= 40%, market risk premium=4%, risk free rate= 4%

    Incremental operating cash flow = (Inflows-outflows-depreciation) x tax rate

    Cost of equity= Rm-(Rm-Rf)b = 4-(4-4)1.5 =4%x1.5 =6%

    Year 1 Year 2 Year 3


    $ $ $
    Revenues (EBITA) 50 65 70
    Depreciation 15 12 8
    EBITDA 65 77 78
    Variable expenses (2.5) (2.5) (2.5)
    Working capital (5) (6.5) (7)
    Other operating expenses (20) (22) (26)
    37.5 46 42.5
    Less Tax 40% 40% 40%
    Tax 15 18.4 17
    Free cash flow 22.5 27.6 25.5

    What is the NPV of this investment?

    Free cash flow($) Pvif (n, 6%)


    Year 1 22.5 21.22
    Year 2 27.6 24.56
    Year 3 25.5 21.41
    PV $67.19
    NPV= Present value –initial cost = 67.19-45= $22.19m

    Suppose after tax cash flow increases by $7.5m

    PVAF (3, 6%) =2.6730

    FV= 2.6730X7.5 =$20.0475M

    PV (6, 6%)= 0.7050X20.0475 =$14.1334M

    TOTAL PV =$81.3234M

    NPV =$81.3234-45 =$36.3234M

    The NPV increases when free cash flow is increased by $7.5m for the next three years. Recommended.

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