Question

Aramark is considering a 3-year project with an initial cost of $570,000. The project will not directly produce any sales but will reduce operating costs by $147,000 a year. The equipment is classified as MACRS 7-year property. The MACRS table values are .1429, .2449, .1749, .1249, .0893, .0892, .0893, and .0446 for Years 1 to 8, respectively. At the end of the project, the equipment will be sold for an estimated $295,000. The tax rate is 25 percent and the required return is 12 percent. An extra $41,000 of inventory will be required for the life of the project. What is the total cash flow for Year 3? $459,738.50 $465,546.17 $476,218.44 $481,983.20 $488,549.26

Answer 1

Initial Cost = $570,000
Useful Life = 3 years

Depreciation Expense for Year 1 = $570,000 * 0.1429
Depreciation Expense for Year 1 = $81,453

Depreciation Expense for Year 2 = $570,000 * 0.2449
Depreciation Expense for Year 2 = $139,593

Depreciation Expense for Year 3 = $570,000 * 0.1749
Depreciation Expense for Year 3 = $99,693

Book Value at the end of Year 3 = $570,000 - $81,453 - $139,593 - $99,693
Book Value at the end of Year 3 = $249,261

Salvage Value = $295,000

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax
After-tax Salvage Value = $295,000 - ($295,000 - $249,261) * 0.25
After-tax Salvage Value = $283,565.25

Initial Investment in NWC = $41,000

Operating Cash Flow in Year 3 = Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow in Year 3 = $147,000 * (1 - 0.25) + 0.25 * $99,693
Operating Cash Flow in Year 3 = $135,173.25

Net Cash Flow in Year 3 = Operating Cash Flow + After-tax Salvage Value + Investment in NWC recovered
Net Cash Flow in Year 3 = $135,173.25 + $283,565.25 + $41,000
Net Cash Flow in Year 3 = $459,738.50