Kelley Group is considering an investment of $2 million in an asset with an economic life of four years. The cash revenues and expenses in year 1 are expected to be $1.8m and $0.5m respectively. Both revenues and expenses are expected to grow at 3 percent per year. The asset will be fully depreciated to zero using the straight line method over its economic life. The salvage value of the asset is expected to be $0.3m at the end of the fourth year. Kelley Group also needs to add net working capital of $0.1m immediately, and this capital will be recovered in full at the end of the project's life. The tax rate is 40%. What is the investment's cash flow in year 4?
A) $1.1323m
B) $1.4523m
C) $1.3323m
D) $1.3579m

Question

Quizplus · Accepted Answer

In year 4, [(1.8 * 1.03³ - 0.5 * 1.03³ )*(1-0.4) + 0.5*0.4 ]operating cash flow + 0.1change of working capital + 0.3*(1-0.4) sale of equipment = 1.3323 m

Kelley Group Is Considering an Investment of $2 Million in an Asset