EC 314: Public and Private Investment PASS NO PASS

Q4: Income Cash Flow

#3 Name:

Consider the following transaction that involves the purchase of a Thneed. The Thneed
is a 5 year asset with a cost basis of $10,000.00. The Theed produces a small increase in
sales, $2,000.00 but costs and additional to operate each year, $1,000.00.
The Thneed was purchaced with a small loan of $5,000.00 at a 10.00% annual rate repaid
with a single payment in year 2. You anticipate selling the Thneed in year 2 for $5,000.00.
Your firm faces a combined tax rate of 40.00% and a MARR of 20.00%.
Year 3 Year 5 Year 7 Year 10 Year 15 Year
1 33.33 20.00 14.29 10.00 5.00
2 44.45 32.00 24.49 18.00 9.50
3 14.81 19.20 17.49 14.40 8.55
4 7.41 11.52 12.49 11.52 7.70
5 11.52 8.93 9.22 6.93
6 5.76 8.92 7.37 6.23
7 8.93 6.55 5.90
8 4.46 6.55 5.90
9 6.56 5.91
10 6.55 5.90
11 3.28 5.91
12 5.90
13 5.91
14 5.90
15 5.91
16 2.95
 Income Statement
Year 1 Year 2 Year 3 Year 4
Operating Revenue
Operating Expenses
Interest
Depreciation
Taxable Income
Tax
Net Income

Cash Flow
Operations
Net Income
Depreciation
Investments

Working Capital
Gains Tax

Finance

Net Cash Flow

1. Fill in the Income and Cash Flow Statement above.

2. Is this a good investment?