Question

A 4-year project has an annual operating cash flow of $53,500. At the beginning of the project, $4,450 in net working capital was required, which will be recovered at the end of the project. The firm also spent $22,800 on equipment to start the project. This equipment will have a book value of $4,820 at the end of the project, but can be sold for $5,790. The tax rate is 35 percent. What is the Year 4 cash flow?
A. $61,714
B. $54,501
C. $20,633
D. $64,080
E. $63,401

Answer 1

Answer:

E. $63,401

Explanation:

gain on disposal = salvage value of plant - book value on date of sale

                            = $5,790 - $4,820

                            = $970

tax on disposal = $970*35%

                          = $339.50

after tax salvage value = $5,790 - $339.50

                                       = $5,450.50

total cash flow in 4 years

= annual operating cash flow + net working capital + after tax salvage value

= $53,500 + $4,450 + $5,450.50

= $63,401

Therefore, The Year 4 cash flow is $63,401.