Question

A 4-year project has an annual operating cash flow of $51,000. At the beginning of the project, $4,200 in net working capital was required, which will be recovered at the end of the project. The firm also spent $22,300 on equipment to start the project. This equipment will have a book value of $4,620 at the end of the project, but can be sold for $5,640. The tax rate is 40 percent. What is the Year 4 cash flow

Answer 1

Answer: $60,432‬

Explanation:

The equipment can be sold for $5,640 yet the book value is $4,620. The gain is therefore;

= 5,640 - 4,620

= $1,020

After tax cashflow from sale

= Sales price - tax on gain

= 5,640 - (1,020 * 40%)

= $5,232

Cash-flow in 4th year = Annual Cash flow + after-tax cash-flow from sales + net working capital recovered

= 51,000 + 5,232 + 4,200

= $60,432‬