Question

Stu is working on a bid for a contract. Thus far, he has determined that he will need $218,000 for fixed assets and another $41,000 for net working capital at Time 0. He had also determined that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the end of the 3-year project. What operating cash flow will be required each year for the project to return 14 percent in nominal terms?

Answer 1

The cash flow should be equal to 88,634.74

Step-by-step explanation:

218,000 investment on fixed assets

41,000 working capital

investment at year 0 259,000

present value of salvage value

79,900

time = 3 years

rate = 0.14

`(Principal)/((1 + rate)^(time) ) = PV`

`(79,900)/((1 + 0.14)^(3) ) = PV`

PV 53,222.75

259,000 - 53,222.75 = 205,777.25 present value of the operating cash flow

Now we have to calcualte the cuota of a 3 years annuity of present value equal to 205,777.25 at 14% rate

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

`C * (1-(1+.014)^(-3) )/(0.14) = 205,777.25\\`

`205,777.25 / (1-(1+.014)^(-3) )/(0.14) = C\\`

C = 88,634.74

The cash flow should be equal to 88,634.74