What is the undiscounted cash flow in the final year of an investment, assuming: 10,000 after-tax cash flows from operations, the fully depreciated machine, the sole asset in the pool, is sold for $1,000, the project had required $2,000 in additional working capital, and a 35 percent tax rate?
A)$8,450
B)$12,600
C)$12,650
D)$14,000

Question

Quizplus · Accepted Answer

The undiscounted cash flow in the final year includes the after-tax cash flows from operations, the after-tax proceeds from the sale of the machine, and the recovery of working capital. The calculation is as follows: - After-tax cash flows from operations: $10,000 (given directly, no need for adjustment). - Sale of the machine: The machine is sold for $1,000. Since it is fully depreciated, the entire sale amount is considered a gain, which is then taxed. The after-tax proceeds from the sale are $1,000 - ($1,000 * 35%) = $1,000 - $350 = $650. - Recovery of working capital: The $2,000 in additional working capital is recovered in full at the end of the project, as it is not subject to tax. Therefore, the total undiscounted cash flow in the final year is $10,000 (operations) + $650 (sale of machine after tax) + $2,000 (recovery of working capital) = $12,650.

What Is the Undiscounted Cash Flow in the Final Year