Question

"Explorer, Inc. is considering a new 4-year project that requires an initial fixed asset (equipment) investment of $200,000. The fixed asset is three-year MACRS property for tax purposes. In four years, the equipment will be worth about half of what we paid for it. The project is estimated to generate $500,000 in annual sales, with costs of $400,000. The firm has to invest $100,000 in net working capital at the start. After that, net working capital requirements will be 25 percent of sales. The tax rate is 21 percent. What is the incremental cash flow in year 4

Answer 1

The Incremental cash flow in year 4 is $161,112

Step-by-step explanation:

According to the given data, the Statement showing accumulated depreciation and book value of asset is as follows:

Year Current year depreciation Accumulated depreciation Book value

0 $200,000

1 $200,000*33.33% $66,660 133,340

2 $200,000*44.45% $88,900 44,440

3 $200,000*14.81% $29,620 14,820

4 $200,000*7.41% $14,820 0

After tax salvage value of equipment at the end of 4th year =(Sale value-Book value)*(1-tax rate)

=[($200,000*50%)-$0]*(1-0.21)

=$79,00 0

Statemet showing Incremental cash flow in year 4

Amout($)

Sales 500,000

Less:Cost 400,000

Less:Depreciation 14,820

Earning before tax 85,180

Less:Tax21% 17,887

Earning after tax 67,292

Add:Depreciation 14,820

Add:after tax salvage value of equipment 79,000

Net cash flow $161,112

The Incremental cash flow in year 4 is $161,112