Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets,$160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project,the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is 15%. What is the amount of the after-tax cash flow from the sale of the fixed assets at the end of this project?
(Round your answer to whole dollars.)

Question

Quizplus · Accepted Answer

The fixed assets can be sold for 25% of their original cost, which is $325,000 * 0.25 = $81,250. The book value at the end of the project is $0, so the entire $81,250 is a gain. The after-tax cash flow is $81,250 * (1 - 0.35) = $52,813.

Margarite's Enterprises Is Considering a New Project