Question

9. A project has an annual operating cash flow of $52,620. Initially, this four-year project required $5,160 in net working capital, which is recoverable when the project ends. The firm also spent $39,700 on equipment to start the project. This equipment will have a book value of $17,014 at the end of Year 4. What is the total cash flow for Year 4 of the project if the equipment can be sold for $15,900 and the tax rate is 35 percent

Answer 1

$74,069.9

Step-by-step explanation:

The components of cash flow for year 4 of the projects are:

+) the recovery of net working capital

+) the annual operating cash flow

+) the value equipment can be sold

+) the tax payment

As given:

+) The recovery of networking capital = $5,160

+) The annual operating cash flow = $52,620

+) The salvage value of equipment = $15,900

+) The tax the company has to pay is:

Tax payment = (Market value - Book value) x Tax rate = (15,900-17,014) x 0.35 = -389.9

The cash flow for year 4 = Annual operating cash flow + recovery of net working capital + salvage value of equipment - tax payment

= 52,620 + 5,160 + 15,900 - (-389.9) = $74,069.9