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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Sundaram Foods Ltd is evaluating a project costing Rs 80 lakh with 5-year life and nil salvage value, depreciated on straight-line basis. Expected annual profit before depreciation and tax is Rs 32 lakh. Tax rate is 25%. What is the annual operating cash flow after tax?

The annual operating cash flow is Rs 28 lakh. Depreciation is Rs 16 lakh, profit before tax Rs 16 lakh, tax Rs 4 lakh, and profit after tax Rs 12 lakh; adding back depreciation gives Rs 28 lakh. Equivalently, Rs 32 lakh less Rs 4 lakh tax.

  1. ARs 24 lakh
  2. BRs 28 lakhCorrect
  3. CRs 20 lakh
  4. DRs 32 lakh

Explanation

Depreciation = 80/5 = Rs 16 lakh. PBT = 32 - 16 = 16 lakh. Tax at 25% = 4 lakh. PAT = 12 lakh. Cash flow = PAT + depreciation = 12 + 16 = Rs 28 lakh. Check: 32 - 4 tax = 28. Rs 24 lakh arises from taxing the whole 32 lakh (32 x 0.75) and ignoring the depreciation tax shield.

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