This is accounting net income after tax. It is not net cash flow after tax. Net cash flow after tax is operating cash flow after tax (excluding depreciation) plus the depreciation tax shield.
Net cash flow for Year 3 would be: Operating cash flow: Sales: 125,000 × $80 × .95 × .95 $9,025,000 Labor: 125,000 × $20 × 1.05 × 1.05 (2,756,250) Materials: 125,000 × $30 × 1.10 × 1.10 (4,537,500) Fixed cost (300,000 ) Net operating cash flow before tax $1,431,250 Tax at 40% (572,500 ) Net operating cash flow after tax $ 858,750 Plus Depreciation tax shield: ($2,000,000 / 4) × .40 200,000 Net after-tax cash flow $1,058,750
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This is the net operating cash flow after tax. Net cash flow after tax includes this plus the depreciation tax shield.
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The investment of $2 million will be depreciated on a straight-line basis over 4 years for financial reporting and tax purposes. Webster's effective tax rate is 40%. When calculating net present value (NPV), the net cash flow for year 3 would be