Question

A project has an annual operating cash flow of $52,620. Initially, this four-year project required $5,160 in net working capital, which is recoverable when the project ends. The firm also spent $39,700 on equipment to start the project. This equipment will have a book value of $17,014 at the end of Year 4. What is the cash flow for Year 4 of the project if the equipment can be sold for $15,900 and the tax rate is 35 percent? Group of answer choices

Answer 1

Answer:

$73,680

Explanation:

The cash inflows from the project in year 4 consists of the following:  

1) operating cash flow  

2) recovery of net working capital  

3) salvage value of the equipment after tax  

The operating cash flow is $52,620. The recovery of the net working capital is $5,160. The book value of the equipment at the end of year 4 is $17,014, and the market value is $15,900. Since the market value is lower than the book value, there is no capital gain and hence no tax. Therefore, the cash flow for the 4 year period after the equipment has been sold for $15,900 is shown below

The total cash flow in year 4 = $52,620 + $5,160 + $15,900 = $73,680.