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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

A project generates additional annual cash revenue of Rs 8,00,000 and cash expenses of Rs 5,00,000, with annual depreciation of Rs 1,00,000. The tax rate is 25%. Using the tax-shield approach, what is the annual after-tax cash flow?

The annual after-tax cash flow is Rs 2,50,000. Net cash operating profit of Rs 3,00,000 after 25% tax gives Rs 2,25,000, and the depreciation tax shield adds Rs 25,000. Equivalently, profit after tax of Rs 1,50,000 plus depreciation of Rs 1,00,000 equals Rs 2,50,000.

  1. ARs 2,25,000
  2. BRs 2,50,000
  3. CRs 2,75,000Correct
  4. DRs 2,00,000

Explanation

After-tax cash flow = (Revenue - cash expenses)(1 - t) + depreciation x t = 3,00,000 x 0.75 + 1,00,000 x 0.25 = 2,25,000 + 25,000 = Rs 2,50,000. Check: PBT 2,00,000, tax 50,000, PAT 1,50,000, plus depreciation 1,00,000 = 2,50,000. So the correct figure is Rs 2,50,000.

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