Question

A 4-year project has an annual operating cash flow of $54,000. At the beginning of the project, $4,500 in net working capital was required, which will be recovered at the end of the project. The firm also spent $22,900 on equipment to start the project. This equipment will have a book value of $4,860 at the end of the project, but can be sold for $5,820. The tax rate is 40 percent. What is the Year 4 cash flow

Answer 1

The Year 4 cash flow is $49,076.

Step-by-step explanation:

To calculate the Year 4 cash flow, we need to consider the operating cash flow, the net working capital, and the book value of the equipment. The operating cash flow for each year is $54,000. The net working capital required at the beginning of the project is $4,500, which will be recovered at the end. The book value of the equipment at the end of the project is $4,860, but it can be sold for $5,820. Taking into account the tax rate of 40 percent, we can calculate the Year 4 cash flow as follows:

Year 4 Cash Flow = Operating Cash Flow - Net Working Capital + (Sales Price of Equipment - Book Value of Equipment) - (Tax Rate × (Sales Price of Equipment - Book Value of Equipment))

Year 4 Cash Flow = $54,000 - $4,500 + ($5,820 - $4,860) - (0.40 × ($5,820 - $4,860))

Year 4 Cash Flow = $54,000 - $4,500 + $960 - (0.40 × $960)

Year 4 Cash Flow = $54,000 - $4,500 + $960 - $384 = $49,076

Answer 2

$64,704

Step-by-step explanation:

Year 4 cash flow = operating cash flow + non operating cash flow

non operating cash flow = salvage value + net working capital - tax(Salvage value - book value)

$5,820 + $4,500 - 0.4($5,820 - $4,860) = $10,704

$10,704 + $54,000 = $64,704