Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9000. The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The working capital investment is recovered in the final year of the project. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.
A)$32,000
B)$27,000
C)$24,000
D)None of the above

Question

Quizplus · Accepted Answer

The net cash flow in year 10 includes the final year's operating cash flow, the recovery of working capital, and the salvage value of the equipment. Operating cash flow is calculated as (Revenue - Expenses) * (1 - Tax Rate) + Depreciation * Tax Rate. Add the recovered working capital and salvage value to this to get the total cash flow.

Consider a Capital Expenditure Project with an Expected 10-Year Economic