Financial ManagementQuestion 5549 of 217
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2. What is the Cash Inflow after Taxes for the Year 1, Year 2 and Year 3 of the investment proposal ?

Options

A` 1,50,000, ` 1,85,000, ` 3,45,000
B`1,65,000, ` 1,95,500, ` 3,55,000
C` 1,60,000, ` 1,91,500, ` 3,35,000 FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT
D` 1,70,000, ` 1,90,000, ` 3,40,000
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Correct Answer

Option C` 1,60,000, ` 1,91,500, ` 3,35,000 FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT

All Options:

  • A` 1,50,000, ` 1,85,000, ` 3,45,000
  • B`1,65,000, ` 1,95,500, ` 3,55,000
  • C` 1,60,000, ` 1,91,500, ` 3,35,000 FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT
  • D` 1,70,000, ` 1,90,000, ` 3,40,000

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Detailed Solution & Explanation

Correct Answer: Option **C** Explanation: To find the Cash Inflow after Taxes (CFAT) for Year 1, Year 2, and Year 3, we first compute the Profit before Taxes (PBT), apply the tax rate of 30% to find the Profit after Taxes (PAT), and then add back the non-cash depreciation expense.
textCashInflowAfterTaxes(CFAT)=textProfitAfterTaxes(PAT)+textDepreciation\\text{Cash Inflow After Taxes (CFAT)} = \\text{Profit After Taxes (PAT)} + \\text{Depreciation}
textWhere:textPAT=textPBTtimes(1textTaxRate)\\text{Where: } \\text{PAT} = \\text{PBT} \\times (1 - \\text{Tax Rate})
textAnnualDepreciation=90,000\\text{Annual Depreciation} = 90,000
* **For Year 1:**
* Additional Sales Units = 20,000\displaystyle 20,000 units, Selling Price = 30\displaystyle ` 30 per unit
* Sales Revenue = 20,000times30=6,00,000\displaystyle 20,000 \\times 30 = ` 6,00,000
* Variable Cost = 20,000times20=4,00,000\displaystyle 20,000 \\times 20 = ` 4,00,000
* Additional Fixed Cost = 25,000\displaystyle ` 25,000
* Savings in breakages = 15,000\displaystyle ` 15,000
* Depreciation = 90,000\displaystyle ` 90,000
* textPBTtextYear1=(6,00,0004,00,000)25,000+15,00090,000\\text{PBT}_{\\text{Year 1}} = (6,00,000 - 4,00,000) - 25,000 + 15,000 - 90,000
* textPBTtextYear1=2,00,00025,000+15,00090,000=1,00,000\\text{PBT}_{\\text{Year 1}} = 2,00,000 - 25,000 + 15,000 - 90,000 = 1,00,000
* \displaystyle &#x27; in math mode at position 68: … 0.30) = 70,000̲<br> *" style="color:#cc0000">\\text{PAT}_{\\text{Year 1}} = 1,00,000 \\times (1 - 0.30) = 70,000\displaystyle &lt;br&gt; *</span>\\text{CFAT}_{\\text{Year 1}} = 70,000 + 90,000 = 1,60,000<span class="katex-display"><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML" display="block"><semantics><mrow><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo><mo>∗</mo><mo>∗</mo><mi>F</mi><mi>o</mi><mi>r</mi><mi>Y</mi><mi>e</mi><mi>a</mi><mi>r</mi><mn>2</mn><mo>:</mo><mo>∗</mo><mo>∗</mo><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo></mrow><annotation encoding="application/x-tex">&lt;br&gt;* **For Year 2:**&lt;br&gt; *</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.5782em;vertical-align:-0.0391em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span><span class="mspace" style="margin-right:0.2222em;"></span><span class="mbin">∗</span><span class="mspace" style="margin-right:0.2222em;"></span></span><span class="base"><span class="strut" style="height:0.6833em;"></span><span class="mord">∗</span><span class="mord mathnormal" style="margin-right:0.13889em;">F</span><span class="mord mathnormal" style="margin-right:0.02778em;">or</span><span class="mord mathnormal" style="margin-right:0.22222em;">Y</span><span class="mord mathnormal">e</span><span class="mord mathnormal">a</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mord">2</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">:</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.5782em;vertical-align:-0.0391em;"></span><span class="mord">∗</span><span class="mord">∗</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span></span></span></span></span>\\text{PBT}_{\\text{Year 2}} = 1,45,000<span class="katex-display"><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML" display="block"><semantics><mrow><mo stretchy="false">(</mo><mi>c</mi><mi>a</mi><mi>l</mi><mi>c</mi><mi>u</mi><mi>l</mi><mi>a</mi><mi>t</mi><mi>e</mi><mi>d</mi><mi>i</mi><mi>n</mi><mi>Q</mi><mi>u</mi><mi>e</mi><mi>s</mi><mi>t</mi><mi>i</mi><mi>o</mi><mi>n</mi><mn>1</mn><mo stretchy="false">)</mo><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo></mrow><annotation encoding="application/x-tex">(calculated in Question 1)&lt;br&gt; *</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:1em;vertical-align:-0.25em;"></span><span class="mopen">(</span><span class="mord mathnormal">c</span><span class="mord mathnormal">a</span><span class="mord mathnormal" style="margin-right:0.01968em;">l</span><span class="mord mathnormal">c</span><span class="mord mathnormal">u</span><span class="mord mathnormal" style="margin-right:0.01968em;">l</span><span class="mord mathnormal">a</span><span class="mord mathnormal">t</span><span class="mord mathnormal">e</span><span class="mord mathnormal">d</span><span class="mord mathnormal">in</span><span class="mord mathnormal">Q</span><span class="mord mathnormal">u</span><span class="mord mathnormal">es</span><span class="mord mathnormal">t</span><span class="mord mathnormal">i</span><span class="mord mathnormal">o</span><span class="mord mathnormal">n</span><span class="mord">1</span><span class="mclose">)</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span></span></span></span></span>\\text{PAT}_{\\text{Year 2}} = 1,45,000 \\times (1 - 0.30) = 1,01,500<span class="katex-display"><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML" display="block"><semantics><mrow><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo></mrow><annotation encoding="application/x-tex">&lt;br&gt; *</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.5782em;vertical-align:-0.0391em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span></span></span></span></span>\\text{CFAT}_{\\text{Year 2}} = 1,01,500 + 90,000 = 1,91,500<span class="katex-display"><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML" display="block"><semantics><mrow><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo><mo>∗</mo><mo>∗</mo><mi>F</mi><mi>o</mi><mi>r</mi><mi>Y</mi><mi>e</mi><mi>a</mi><mi>r</mi><mn>3</mn><mo>:</mo><mo>∗</mo><mo>∗</mo><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo></mrow><annotation encoding="application/x-tex">&lt;br&gt;* **For Year 3:**&lt;br&gt; *</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.5782em;vertical-align:-0.0391em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span><span class="mspace" style="margin-right:0.2222em;"></span><span class="mbin">∗</span><span class="mspace" style="margin-right:0.2222em;"></span></span><span class="base"><span class="strut" style="height:0.6833em;"></span><span class="mord">∗</span><span class="mord mathnormal" style="margin-right:0.13889em;">F</span><span class="mord mathnormal" style="margin-right:0.02778em;">or</span><span class="mord mathnormal" style="margin-right:0.22222em;">Y</span><span class="mord mathnormal">e</span><span class="mord mathnormal">a</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mord">3</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">:</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.5782em;vertical-align:-0.0391em;"></span><span class="mord">∗</span><span class="mord">∗</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span></span></span></span></span>\\text{PBT}_{\\text{Year 3}} = 3,50,000<span class="katex-display"><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML" display="block"><semantics><mrow><mo stretchy="false">(</mo><mi>c</mi><mi>a</mi><mi>l</mi><mi>c</mi><mi>u</mi><mi>l</mi><mi>a</mi><mi>t</mi><mi>e</mi><mi>d</mi><mi>i</mi><mi>n</mi><mi>Q</mi><mi>u</mi><mi>e</mi><mi>s</mi><mi>t</mi><mi>i</mi><mi>o</mi><mi>n</mi><mn>1</mn><mo stretchy="false">)</mo><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo></mrow><annotation encoding="application/x-tex">(calculated in Question 1)&lt;br&gt; *</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:1em;vertical-align:-0.25em;"></span><span class="mopen">(</span><span class="mord mathnormal">c</span><span class="mord mathnormal">a</span><span class="mord mathnormal" style="margin-right:0.01968em;">l</span><span class="mord mathnormal">c</span><span class="mord mathnormal">u</span><span class="mord mathnormal" style="margin-right:0.01968em;">l</span><span class="mord mathnormal">a</span><span class="mord mathnormal">t</span><span class="mord mathnormal">e</span><span class="mord mathnormal">d</span><span class="mord mathnormal">in</span><span class="mord mathnormal">Q</span><span class="mord mathnormal">u</span><span class="mord mathnormal">es</span><span class="mord mathnormal">t</span><span class="mord mathnormal">i</span><span class="mord mathnormal">o</span><span class="mord mathnormal">n</span><span class="mord">1</span><span class="mclose">)</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span></span></span></span></span>\\text{PAT}_{\\text{Year 3}} = 3,50,000 \\times (1 - 0.30) = 2,45,000<span class="katex-display"><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML" display="block"><semantics><mrow><mo>&lt;</mo><mi>b</mi><mi>r</mi><mo>&gt;</mo><mo>∗</mo></mrow><annotation encoding="application/x-tex">&lt;br&gt; *</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.5782em;vertical-align:-0.0391em;"></span><span class="mrel">&lt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.7335em;vertical-align:-0.0391em;"></span><span class="mord mathnormal">b</span><span class="mord mathnormal" style="margin-right:0.02778em;">r</span><span class="mspace" style="margin-right:0.2778em;"></span><span class="mrel">&gt;</span><span class="mspace" style="margin-right:0.2778em;"></span></span><span class="base"><span class="strut" style="height:0.4653em;"></span><span class="mord">∗</span></span></span></span></span>\\text{CFAT}_{\\text{Year 3}} = 2,45,000 + 90,000 = 3,35,000<br>Therefore,theCashInflowafterTaxes(CFAT)forYear1,Year2,andYear3are\displaystyle <br>Therefore, the Cash Inflow after Taxes (CFAT) for Year 1, Year 2, and Year 3 are` 1,60,000,\displaystyle ,` 1,91,500,and\displaystyle , and` 3,35,000$ respectively.
Hence, **Option C** is the correct answer.

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