Question

A 4-year project has an annual operating cash flow of $49,000. At the beginning of the project, $4,000 in net working capital was required, which will be recovered at the end of the project. The firm also spent $21,900 on equipment to start the project. This equipment will have a book value of $4,460 at the end of the project, but can be sold for $5,520. The tax rate is 35 percent. What is the Year 4 cash flow?

Answer 1

Answer:

$58,149

Explanation:

initial outlay (year 0) = cost of equipment + increase in net working capital = -$25,900

net cash flow year 1 = operating cash flow = $49,000

net cash flow year 2 = operating cash flow = $49,000

net cash flow year 3 = operating cash flow = $49,000

net cash flow year 4 = operating cash flow + net working capital + after tax salvage value:

• operating cash flow = $49,000
• net working capital = $4,000
• after tax salve value = $5,520 - [($5,520 - $4,460) x 35%] = $5,149

total cash flow year 4 = $49,000 + $4,000 + $5,149 = $58,149