Margarite's Enterprises is considering a new project.The project will require €325,000 for new non-current assets,€160,000 for additional inventory and €35,000 for additional trade receivables.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 non-current assets will be depreciated straight-line to a zero book value over the life of the project.At the end of the project,the non-current 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 non-current assets at the end of this project? (Round your answer to whole euros.)

Question

Quizplus · Accepted Answer

1. Calculate the initial investment:
- Non-current assets: €325,000
- Additional inventory: €160,000
- Additional trade receivables: €35,000
- Increase in short-term debt: €100,000
- Increase in long-term debt: €300,000
Total initial investment: €920,000

2. Calculate annual operating cash flow:
- Sales: €554,000
- Costs: €430,000
Operating cash flow: €124,000

3. Calculate the salvage value of non-current assets at the end of project:
Depreciation expense = €325,000 / 5 years = €65,000
Book value at the end of the project = €0
Tax value = €65,000 x 35% = €22,750
Salvage value = €325,000 x 25% = €81,250

4. Calculate the after-tax cash flow from the sale of non-current assets at the end of the project:
- Sales price: €81,250
- Tax value: €22,750
- Capital gains tax: (€81,250 - €22,750) x 20% = €11,500
After-tax cash flow: €81,250 - €22,750 - €11,500 = €47,000

5. Calculate the total cash flow:
Total cash inflow: €47,000
Total cash outflow: €920,000
Total cash flow: -€873,000

Therefore, the best choice is C) €52,813 since it is the closest option to the calculated after-tax cash flow from the sale of non-current assets at the end of the project (€47,000).

Margarite's Enterprises Is Considering a New Project