Questions about finance

The firm’s cash flow for a new project annually can be calculated by subtracting total variable and fixed expenses from the revenue generated. The variable and fixed costs are 900,000. This subtracts from 1,800,000 in revenue. It will produce a profit totaling 900,000. Before arriving at the cash flow final figure, we must account for both depreciation and taxation.

Since depreciation should be considered an expense, it must be taken from available profits. In this example depreciation expense will increase by 160,000 annually making our revised profit number 740,000. To calculate tax liability for this amount we must multiply taxable income with applicable tax rate i-e 37% – resulting in a taxation bill of 273 200$. After subtracting taxes from the earlier computed profits, we get 466 800$ net cash flow.

The annual cash flow from the new project amounts to 466 800$. This can be used for business operations, or it can be distributed among its shareholders according to their expectations. Therefore, calculating cash flows accurately for all projects can help companies better manage their money and inform them about potential investments or divestments.