VR Corporation has the opportunity to invest in a new project, the details of which are shown below. What is the Year 1 cash flow for the project?

$\begin{array}{l}
\begin{array} { l }
\text { Sales revenues } \
\text { Depreciation}\
\text { Other operating costs}\
\text { Interest expense }\
\text { Tax rate}
\end{array}
\begin{array} { l }
\$ 42,500 \
\$ 10,000 \
\$ 17,000 \
\$ 4,000\
35.0\%
\end{array}
\end{array}$

Question

VR Corporation has the opportunity to invest in a new project, the details of which are shown below. What is the Year 1 cash flow for the project?

$\begin{array}{l}
\begin{array} { l } 
\text { Sales revenues } \
\text { Depreciation}\
\text { Other operating costs}\
\text { Interest expense }\
\text { Tax rate}
\end{array}
\begin{array} { l } 
\$ 42,500 \
\$ 10,000 \
\$ 17,000 \
\$ 4,000\
35.0\%
\end{array}
\end{array}$

Quizplus · Accepted Answer

This problem is a bit harder than some of the other ones because it provides information on interest, and some students might incorrectly include it as an input. We like this wrinkle because it's important for students to know not to include financing costs in the cash flows.
 
$\begin{array}{l}
\begin{array} { l } 
\text { Sales revenues }& \
\text { - Operating costs (excl. deprec.) }&\
\text { - Depreciation }&\
\text { Operating income (EBTT) }& \
\text { - Taxes }&\text { Rate }=35 \%\
\text { After-tax EBIT }&\
\text { $ + $ Depreciation }&\
\text { Cash flow. Year 1 }&
\end{array}
\begin{array} { l } 
\$ 42,500\
17,000\
10,000\
\$ 15,500\
5,425\
\$ 10,075\
10,000\
\$ 20,075
\end{array}
\end{array}$

VR Corporation Has the Opportunity to Invest in a New