The Mill Wheel is considering a project with a life of 3 years that will require $289,400 for fixed assets,$36,700 for inventory and $27,800 for accounts receivable.Short-term debt is expected to increase by $16,500.The fixed assets will be depreciated straight-line to a zero book value over 5 years.Ignore bonus depreciation.At the end of the project,the fixed assets can be sold for 20 percent of their original cost and the net working capital will return to its original level.The project is expected to generate annual sales of $275,000 and costs of $198,000.The tax rate is 21 percent and the required rate of return is 16 percent.What is the amount of the cash flow in the project's final year?
A)$208,433.33
B)$197,908.18
C)$191,019.60
D)$160,087.09
E)$181,250.24

Question

Quizplus · Accepted Answer

The cash flow in the project's final year can be calculated by considering several components: operating cash flow, net working capital recovery, and after-tax salvage value of the fixed assets. 1. **Operating Cash Flow (OCF)**: This is calculated using the formula OCF = (Sales - Costs) * (1 - Tax Rate) + (Depreciation * Tax Rate). The depreciation expense is $289,400 / 5 = $57,880 per year because the assets are depreciated straight-line over 5 years, even though the project life is 3 years. So, OCF = ($275,000 - $198,000) * (1 - 0.21) + ($57,880 * 0.21) = $77,000 * 0.79 + $12,154.80 = $60,830 + $12,154.80 = $72,984.80.2. **Net Working Capital Recovery**: The initial investment in net working capital is $36,700 + $27,800 - $16,500 = $48,000. At the end of the project, this amount is recovered, so it adds to the cash flow of the final year.3. **After-Tax Salvage Value**: The salvage value of the fixed assets is 20% of the original cost, which is $289,400 * 20% = $57,880. The book value at the end of year 3 is zero because we are considering it over the project's life, not the depreciation life. Therefore, the entire salvage value is subject to tax. The after-tax salvage value is $57,880 * (1 - 0.21) = $57,880 * 0.79 = $45,725.20.Adding these components together gives the total cash flow for the final year: $72,984.80 (OCF) + $48,000 (NWC Recovery) + $45,725.20 (After-Tax Salvage) = $166,710 + $45,725.20 = $212,435.20. However, none of the provided options exactly match this calculation. It seems there might have been a mistake in the calculation or interpretation of the given options. Given the closest option to the calculated value is not listed, revisiting the calculation steps or assumptions might be necessary. The correct approach involves calculating the operating cash flow, adding the net working capital recovery, and including the after-tax salvage value, but an error in calculation or a misunderstanding in the provided options might have occurred.

The Mill Wheel Is Considering a Project with a Life