CS Executive · Corporate Accounting and Financial Management · Capital Budgeting
Sharma Textiles expects a project to give annual profit after depreciation and after tax of Rs 3,60,000. The project cost is Rs 20,00,000, depreciated straight-line over 5 years with no salvage value. What is the annual operating cash flow after tax?
The annual operating cash flow is Rs 7,60,000. Depreciation of Rs 4,00,000 a year is a non-cash charge deducted while arriving at profit, so it is added back to the after-tax profit of Rs 3,60,000 to obtain the cash inflow.
- ARs 3,60,000
- BRs 4,00,000
- CRs 7,60,000Correct
- DRs 3,20,000
Explanation
Annual depreciation = 20,00,000/5 = Rs 4,00,000. Cash flow after tax = PAT + depreciation = 3,60,000 + 4,00,000 = Rs 7,60,000. Rs 3,60,000 ignores the non-cash add-back, while Rs 3,20,000 wrongly subtracts depreciation.
Did you get it right without looking?
One question tells you little. A timed set on Capital Budgeting shows your real accuracy, how long you take and where you lose marks.
More Capital Budgeting questions
- Which feature most clearly makes capital budgeting decisions different from routine working capital decisions?
- Which feature makes capital budgeting decisions different from routine working capital decisions?
- Under capital rationing, why is ranking projects only by NPV potentially misleading when projects are indivisible?
- A project costs Rs 10,00,000 and yields cash inflows of Rs 3,00,000, Rs 4,00,000, Rs 4,00,000 and Rs 5,00,000 in years 1 to 4. Assuming infl…
- Under the capital budgeting process, which statement about a post-completion audit (performance review) is correct?
- Verma Foods plans to replace an old machine with a new one costing Rs 10,00,000. The old machine can be sold for Rs 1,50,000, and its book v…