Question

A 4-year project has an annual operating cash flow of $47,000. At the beginning of the project, $3,800 in net working capital was required, which will be recovered at the end of the project. The firm also spent $21,500 on equipment to start the project. This equipment will have a book value of $4,300 at the end of the project, but can be sold for $5,400. The tax rate is 34 percent. What is the Year 4 cash flow

Answer 1

Answer:

$55,826

Explanation:

The computation of year 4 cash flow is shown below:

= Operating cash flow + required net working capital + after cash flow arise from salvage value

where,

Operating cash flow is $47,000

Required net working capital is $3,800

After cash flow arise from salvage value is

= Sale value - gain on salvage value × tax rate

The gain on salvage value is

= $5,400 - $3,800

= $1,100

So the after cash flow arise is

= $5,400 - $1,100 × 34%

= $5,400 - $374

= $5,026

Now the year 4 cash flow is

= $47,000 + $3,800 + $5,026

= $55,826