Capital Budgeting

Test Yourself—Problems & Solutions

   1.   The A&B Company has sales of Rs. 200 million and total operating expenses (excluding depreciation) of Rs.120 million. Straight-line depreciation on the company’s assets is Rs.15 million, and the maximum accelerated depreciation allowed by law is Rs. 25 million. Assume that all taxable income is taxed at 35 percent and the net operating working capital remains constant. Calculate the company’s after tax operating cash flow using both straight-line and accelerated depreciation.

Solution:

After tax operating cash flow (assuming straight-line depreciation):

Revenues	Rs.200 mn
Total operating expenses	120 mn
Depreciation	15 mn
Operating earnings before taxes	Rs. 65 mn
Tax @ 35%	22.75 mn
Operating ...