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 cash flow for Year 4 of the project if the equipment can be sold for $15,900 and the tax rate is 35 percent?

Question

Quizplus · Accepted Answer

The cash flow for Year 4 includes the operating cash flow, the recovery of net working capital, and the after-tax salvage value of the equipment. The after-tax salvage value is calculated as the sale price minus taxes on the difference between the sale price and book value. The calculation is: $52,620 (operating cash flow) + $5,160 (recovery of net working capital) + [$15,900 (sale price) - 0.35 * ($15,900 - $17,014) (tax on gain)] = $74,069.90.

A Project Has an Annual Operating Cash Flow of $52,620