Thornley Co.is considering a 3-year project with an initial cost of $587,000.The project will not directly produce any sales but will reduce operating costs by $265,000 a year.The equipment is classified as MACRS 7-year property.The MACRS table values are .1429,.2449,.1749,.1249,.0893,.0892,.0893,and .0446 for Years 1 to 8,respectively.At the end of the project,the equipment will be sold for an estimated $295,000.The tax rate is 34 percent and the required return is 9 percent.An extra $23,000 of inventory will be required for the life of the project.What is the total cash flow for Year 3?

Question

Quizplus · Accepted Answer

OCF₃ = $265,000 (1 - .34)+ ($587,000 × .1749)(.34)= $209,806.54Book value₃ = $587,000 × (1 - .1429 - .2449 - .1749)= $256,695.10Aftertax salvage value = $295,000 - .34($295,000 - 256,695.10)= $281,976.33C0₃ = $209,806.54 + 23,000 + 281,976.33 = $514,782.87