Question

you are a project manager. you are estimating cash flows of a potential project that requires investment of $250,000 in a machine, including installation cost, and $40,000 in working capital which will be fully captures at the end of the project. the marchine has the estimated life of 5 years and will be depreciated vie simplified straight-line method. the project is expected to raise the firm's revenues by $330,000 and costs by $125,000 annually. since the trend of the product moves rapidly, you expect to terminate this project in 3 years. in 3 years, the machine you purchase for the project can be sold for $50,000. the firm has the marginal tax rate of 34%. what is the annual cash flow in the second year? round to the nearest penny. do not include a dollar sign in your answer.

Answer 1

To calculate the annual cash flow in the second year, one must consider the revenue, costs, depreciation, tax implications, and ignore salvage value and working capital changes, which only apply at the project's end. After these calculations, the annual cash flow for the second year is $102,300.00.

Step-by-step explanation:

The student is asking how to calculate the annual cash flow in the second year for a project. To find this, we need to consider additional revenues, additional costs, depreciation, changes in working capital, and tax implications. Since this is the second year, we don't have to account for the machine's salvage value or the recapture of working capital, as those are relevant only at the end of the project's life.

So, the calculation is as follows:

• 
  
• Additional yearly revenue: $330,000
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• Additional yearly costs: $125,000
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• Depreciation expense: $250,000 / 5 years = $50,000 per year

Annual operating profit before tax = Additional revenue - Additional costs - Depreciation = $330,000 - $125,000 - $50,000 = $155,000.

Taxes paid = Annual operating profit before tax * Tax rate = $155,000 * 34% = $52,700.

So, the annual cash flow after taxes will be Annual operating profit before tax - Taxes paid = $155,000 - $52,700 = $102,300.

The annual cash flow in the second year, rounded to the nearest penny, is $102,300.00.