Response to the following problem:
The Avalanche Snow Company is evaluating the purchase of a new snow making machine. The marketing and production managers have provided the following change in revenues and expenses associated with the new machine, and the accountant has calculated the depreciation on the machine for the next four years. Assume that there are no changes in working capital in each year.
|
Year
|
Sales
|
Expenses
|
Depreciation
|
|
2001
|
$100,000
|
$50,000
|
$25,000
|
|
2002
|
150,000
|
75,000
|
25,000
|
|
2003
|
125,000
|
75,000
|
25,000
|
|
2004
|
100,000
|
75,000
|
25,000
|
a. What is the operating cash flow for each year if the tax rate is 30%?
b. What is the operating cash flow for each year if the tax rate is 40%?
c. What is the operating cash flow for each year if the tax rate is 50%?
d. Suppose the probability of a 30% tax rate is 10%, the probability of a 40% tax rate is 30% and the probability of a 50% tax rate is 60%. What is the expected operating cash flow for Avalanche? What is the standard deviation of operating cash flows?