A construction company (t = 27%) bought a new bulldozer for $220,000 (CCA rate = 30%). The expected annual revenues and costs that will be created by the machine are Operating cost (OR) = $324,000 Operating cost (QC) = $96,000 Find the net cash flow for Years 1 and 2.

Question

A construction company [latex] (t = 27\%)[/latex] bought a new bulldozer for [latex] \$220,000 (CCA rate = 30\%)[/latex] . The expected annual revenues and costs that will be created by the machine are

Operating cost [latex] (OR) = \$324,000[/latex]

Operating cost [latex] (OC) = \$96,000[/latex]

Find the net cash flow for Years 1 and 2.

Accepted Answer

These are the same data as in Example 12-3, and that solution, net profit calculation, is shown in italics. Below the net profit line, we continue the table to show the actual cash flow. We do this by providing lines for each of the items in Equations 12-4 and 12-5.
There is a negative cash flow at the start of Year 1 that occurred when we bought the bulldozer.

Net cash from operations [latex]= (1 - t)[OR - OC - I] + CCA × t - Dividends[/latex]
= Net profit + CCA - Dividends (12-4)

Net cash flow = Net cash from operations
+ New equity
+ New debt
+ Proceeds from asset disposal
- Repurchase of equity
- Repayment of debt (principal)
- Purchase of assets (12-5)

	Cash Flow at the
	Beginning of Year 1 (Time 0)	End of Year 1	End of Year 2


ORA		[latex]\$324,000[/latex]	[latex]\$324,000[/latex]
OC		96,000	96,000
CCA		33,000	56,100
Taxable income		[latex]\$195,000[/latex]	[latex]\$171,900[/latex]
Less income tax [latex](27\%) [/latex]		52,650	46,413
Net profit		[latex]\$142,350[/latex]	[latex]\$125,487 [/latex]

Calculation of Net Cash Flow
Net profit		[latex]\$142,350[/latex]	[latex]\$125,487[/latex]
+ CCA		33,000	56,100
- Dividends
+New equity
+Proceeds from asset disposal
-Repurchase of equity
-Repayment of debt
-Purchase of assets	[latex]\$220,000[/latex]
Net Cash Flow	[latex]-\$220,000[/latex]	[latex]\$175,350[/latex]	[latex]\$181,587[/latex]

Note: Net profit and net cash flow can be very different numbers. Because the result of the CCA deduction is to reduce the taxable income but not the cash flow, the actual effect of a CCA amount d is to increase the tax flow by an amount t × CCA. This is illustrated in the derivation of Equation 12-4, which shows that the CCA is added to the net profit to get the net funds.
We can now return to the familiar world of cash flow diagrams. In this situation we started with the following before-tax cash flows

which, after taking into account CCA and taxes, produced the following after-tax cash flows:

Question 12.4: A construction company (t = 27%) bought a new bulldozer for ...

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