Question

Stu is working on a bid for a contract. Thus far, he has determined that he will need $218,000 for fixed assets and another $41,000 for net working capital at Time 0. He had also determined that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the end of the 3-year project. What operating cash flow will be required each year for the project to return 14 percent in nominal terms?

Answer 1

Answer:

The cash flow should be equal to 88,634.74

Explanation:

218,000 investment on fixed assets

41,000 working capital

investment at year 0 259,000

present value of salvage value

79,900

time = 3 years

rate = 0.14

$\frac{Principal}{(1 + rate)^{time} } = PV$

$\frac{79,900}{(1 + 0.14)^{3} } = PV$

PV 53,222.75

259,000 - 53,222.75 = 205,777.25 present value of the operating cash flow

Now we have to calcualte the cuota of a 3 years annuity of present value equal to 205,777.25 at 14% rate

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

$C \times \frac{1-(1+.014)^{-3} }{0.14} = 205,777.25$

$205,777.25 \div \frac{1-(1+.014)^{-3} }{0.14} = C$

C = 88,634.74

The cash flow should be equal to 88,634.74