Question

A 4-year project has an annual operating cash flow of $42,000. At the beginning of the project, $6,000 in net working capital was required, which will be recovered at the end of the project. The firm also spent $21,900 on equipment to start the project. This equipment will have a book value of $5,460 at the end of the project, but can be sold for $6,920. The tax rate is 21 percent. What is the Year 4 cash flow?

Answer 1

Total cash flow $54,613

Step-by-step explanation:

The computation of the year 4 cash flow is given below:

Selling price of equipment $6,920

Book value at year 4 end $5,460

Capital gain $1,460

Tax on capital gain at 21% $306.6

So, net cash flow from the sale of equipment

= $6,920 - $307

= $6,613

Now year 4 cash flow is

Annual operating cash flow $42,000

Release of working capital $6,000

Net cash flow form sale of equipment $6,613

Total cash flow $54,613