Case

There are several impacts that each of the changes in the 5 cases tables has on the project’s cash flow. Firstly, if the System cost 20 percent more, the project’s cash flow will increase. This is because a higher System cost results in a lower tax which increases income after tax and a higher depreciation which when added back to the already higher income after tax results in higher operating cash flow.  For instance, the cash flow for the first year increases from $46400 to $49280. Secondly, if the System cost 20 percent less than the original cost, the project’s cash flow will decrease. A lower System cost results in a higher tax that decreases income after tax and a lower depreciation which when added back to the already lower income after tax results in lower operating cash flow. For instance, the cash flow for the first year decreases from $46400 to $43520.

Thirdly, if the expenses were 30 percent more than the original value, the project’s cash flow will increase. Higher expenses results in higher savings in expenses which in turn results in higher change in operating expenses. For instance, the cash flow for the first year increases from $46400 to $56,000. Fourthly, if the expenses were 20 percent more than the original value, the project’s cash flow will decrease. Lower expenses results in lower savings in expenses which in turn results in lower change in operating expenses. For instance, the cash flow for the first year decreases from $46400 to $40000. Finally, if the taxes were lowered by 30 percent, the change in net cash flows will increase. A lower tax rate results in lower income taxes to be paid. Subsequently, the company will have higher income after tax which in turn results in higher operating cash flow. For instance, the cash flow for the first year increases from $46400 to $47000.

It is clear that all the cash flow adjustments in total; will be beneficial to the company overall because the net increases are higher than the net decreases. The overall net effect is an increase in cash flow of $3800 increase as shown below:

Change 1: $2880 increase

Change 2: $2880 decrease

Change 3: $9600 increase

Change 4: $6400 decrease

Change 5: $600 increase

Overall effect: $3800 increase

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