Question

Shado, incorporated, is considering an investment of $455,000 in an asset with an economic life of five years. the firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $293,000 and $91,000, respectively. both revenues and expenses will grow thereafter at the annual inflation rate of 5 percent. the company will use the straight-line method to depreciate its asset to zero over five years. the salvage value of the asset is estimated to be $75,000 in nominal terms at that time. the one-time net working capital investment of $25,000 is required immediately and will be recovered at the end of the project. the corporate tax rate is 25 percent. what is the project’s total nominal cash flow from assets for each year?

Answer 1

To calculate the project's total nominal cash flow for each year, consider revenue, expenses, depreciation, taxes, and salvage value. The first year's cash flow starts with operating income before taxes, from which taxes are deducted, and to which depreciation is added back. Growth due to inflation and the salvage value in the fifth year must also be included.

Step-by-step explanation:

The project's total nominal cash flow from assets for each of the five years can be calculated by considering the revenues, expenses, depreciation, salvage value, net working capital recovery, and taxes. The cash flow for the first year is the revenue ($293,000) minus the expenses ($91,000) and taxes on the operating income. Depreciation is calculated using the straight-line method over five years for the $455,000 investment, giving annual depreciation of ($455,000 / 5) = $91,000. The operating income before taxes is therefore $293,000 - $91,000 - $91,000 = $111,000. After applying the 25% corporate tax rate, the taxes are 0.25 * $111,000 = $27,750, resulting in an after-tax income of $111,000 - $27,750 = $83,250. Since depreciation is a non-cash expense, it is added back to the after-tax income to yield the cash flow from assets, so the cash flow for the first year is $83,250 + $91,000 = $174,250. This cash flow will grow at the inflation rate of 5% for each subsequent year. The salvage value and the recovery of the net working capital will also be factored in the calculation for the fifth year.

Answer 2

The project's total nominal cash flow from assets for each year is $430,000 in Year 0, $202,000 in Year 1, $582,000 from Year 2-5, and $277,000 in Year 5.

To calculate the project's total nominal cash flow from assets for each year, we need to consider the revenues, expenses, depreciation, salvage value, and the one-time net working capital investment.

First, let's calculate the nominal cash flow from assets for each year:

Year 1:

Cash Flow = Cash Revenues - Cash Expenses = $293,000 - $91,000 = $202,000

Years 2-5:

Cash Flow = (Cash Revenues - Cash Expenses) + Depreciation

Depreciation = Initial Cost - Salvage Value = $455,000 - $75,000 = $380,000

Cash Flow = ($293,000 - $91,000) + $380,000 = $582,000

Year 5:

Cash Flow = ($293,000 - $91,000) + Salvage Value = $293,000 - $91,000 + $75,000 = $277,000

Now, let's account for the one-time net working capital investment:

Year 0:

Cash Flow = Initial Cost + Net Working Capital = $455,000 + (-$25,000) = $430,000

Therefore, the project's total nominal cash flow from assets for each year is as follows:

Year 0: $430,000

Year 1: $202,000

Year 2-5: $582,000

Year 5: $277,000

The complete question is here:

Shado, Incorporated, is considering an investment of $455,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $293,000 and $91,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 5 percent. The company will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $75,000 in nominal terms at that time. The one-time net working capital investment of $25,000 is required immediately and will be recovered at the end of the project. The corporate tax rate is 25 percent. What is the project’s total nominal cash flow from assets for each year? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)