Question

A 4-year project has an annual operating cash flow of $50,500. At the beginning of the project, $4,150 in net working capital was required, which will be recovered at the end of the project. The firm also spent $22,200 on equipment to start the project. This equipment will have a book value of $4,580 at the end of the project, but can be sold for $5,610. The tax rate is 35 percent. What is the Year 4 cash flow?a. $19,512

b. $59,900
c. $58,297
d. $60,621
e. $51,600

Answer 1

Option (b) is correct.

Step-by-step explanation:

Given that,

Annual operating cash flow = $50,500

Net working capital = $4,150

Equipment will have a book value = $4,580

Salvage value = $5,610

Gain on disposal:

= Salvage value of plant - Book value on the date of sale

= $5,610 - $4,580

= $1,030

Tax on disposal:

= Gain on disposal × Tax rate

= $1,030 × 35%

= $360.50

After tax salvage value:

= Salvage value of plant - Tax on disposal

= $5,610 - $360.50

= $5,250 (Approx)

Year 4 cash flow:

= Annual operating cash flow + Net working capital + After tax salvage value

= $50,500 + $4,150 + $5,250

= $59,900