Question

a proposed three-year project will require $589,000 for fixed assets, $79,000 for inventory, and $43,000 for accounts receivable. accounts payable are expected to increase by $47,000. the fixed assets will be depreciated straight-line to a zero book value over five years. no bonus depreciation will be taken. at the end of the project, the fixed assets can be sold for $225,000. the net working capital returns to its original level at the end of the project. the operating cash flow per year is $67,900. the tax rate is 21 percent and the discount rate is 12 percent. what is the total cash flow in the final year of the project?

Answer 1

To calculate the total cash flow in the final year of the project, add the operating cash flow, tax payment, and salvage value of the fixed assets.

Step-by-step explanation:

To calculate the total cash flow in the final year of the project, we need to consider the operating cash flow, the tax payment, and the salvage value of the fixed assets. The operating cash flow per year is $67,900, so the total operating cash flow over three years is $67,900 x 3 = $203,700.

The tax rate is 21%, so the tax payment in the final year will be 21% x $203,700 = $42,717.

The fixed assets can be sold for $225,000 at the end of the project, so the salvage value is $225,000.

The total cash flow in the final year is the sum of the operating cash flow, the tax payment, and the salvage value: $203,700 + $42,717 + $225,000 = $471,417.

Answer 2

The total cash flow in the final year of the project is $418,100.

Your analysis is close, but there are a couple of adjustments needed. Let's break down the calculation:

1. Operating Cash Flow: The annual operating cash flow is $67,900, and the project lasts for three years. Therefore, the total operating cash flow over the three years is $67,900 * 3 = $203,700.
2. Salvage Value of Fixed Assets: The fixed assets can be sold for $225,000 at the end of the project. However, since the assets were depreciated straight-line over five years, we need to find the accumulated depreciation. The annual depreciation is $589,000 / 5 = $117,800. Over three years, the accumulated depreciation is $117,800 * 3 = $353,400. Therefore, the book value of the fixed assets at the end of the project is $589,000 - $353,400 = $235,600. The salvage value of $225,000 is less than the book value, so there will be a loss on the sale of assets. The loss is the difference between the book value and the salvage value: $235,600 - $225,000 = $10,600. This loss on the sale reduces the total cash flow. Therefore, the salvage value contribution to the cash flow is $225,000 - $10,600 = $214,400.
3. Working Capital: There are no changes in working capital mentioned in the problem, so we can assume there is no impact on the cash flow from working capital.

Now, let's add up the components:

• Operating Cash Flow: $203,700
• Salvage Value of Fixed Assets: $214,400

Total Cash Flow in the Final Year of the Project = $203,700 + $214,400 = $418,100.

Therefore, the correct total cash flow in the final year of the project is $418,100.