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Corporate finance cash flow conundrum

  • This topic has 3 replies, 2 voices, and was last updated Jun-18 by Stuj79.
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    • ensenmason
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      This problem from the curriculum has me puzzled. Its asking for economic income, but I can’t figure out how it got annual cash flow of $85. I would think it should be deducting $15 for the taxes to determine cash flow, equaling $35. This is frome question 13, reading 23.

      Fontenot Company is investing €100 in a project that is being depreciated straight-line to zero over a two-year life with no salvage value. The project will generate earnings before interest and taxes of €50 each year for two years. Fontenot’s weighted average cost of capital and required rate of return for the project are both 12 percent, and its tax rate is 30 percent.”

    • Stuj79
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      Without looking at the question as I don’t have the curriculum in front of me, my guess would be that you are failing to add back depreciation after deducting taxes from EBIT.

      You multiply EBIT by 1 – tax rate, and then add back depreciation to get the after tax operating cash flow for the year. 

    • ensenmason
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      You’re exactly right.  Not sure why I didn’t see it.  It was late.  Yeah thats it…. 😉 Thanks.

    • Stuj79
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      No probs 😉 happy to help!

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