Question

LO, Inc., is considering an investment of $454,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $292,100 and $90,800, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 4 percent. The company will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $74,000 in nominal terms at that time. The one-time net working capital investment of $24,500 is required immediately and will be recovered at the end of the project. The corporate tax rate is 24 percent.

  

What is the project’s total nominal cash flow from assets for each year? Year 0? Year 1? Year 2? Year 3? Year 4? Year 5?

Answer 1

Given,

Initial Investment = $ 454000

Net working capital = $ 24500

Cash Revenues = $ 292100(Year 1) increasing 4% annually

Expenses = $ 90800(Year 1) increasing 4% annually

Salvage value of asset after 5 years = $ 74000

Tax rate = 24%

It is assumed that Expenses does not include depreciation.