Question

A company expects to have earnings before interest and taxes (UAII) of $ 160,000 in each of the following 6 years. Pay annual interest of $ 15,000. The firm is considering the purchase of an asset that costs $ 140,000, requires $ 10,000 of installation costs and has a 5-year payback period. It will be the sole asset of the company and the depreciation for years 5 and 6 is $ 18,000 and $ 7,500, respectively The company is subject to a 40% tax rate on all profits it makes. The net fixed assets, current assets, accounts payable and accumulated debts of a company have the values ​​indicated below, at the beginning and end of the last year (year 6).

	START	END
	YEAR 6	YEAR 6
Net fixed assets	7,500	0
Current assets	90,000	110,000
Accounts payable	40,000	45,000
Accumulated debts	8,000	7,000

Operating cash flow at the end of the fifth year (FEO) equals : ____________

Answer 1

Please see the table below. The last line is your answer:

Annual cash flows from the new asset = Initial investment / payback period = (140,000 + 10,000) / 5 = 30,000

Parameter	Linkage	$
Current income	A	160,000
Income from new asset	B	30,000
[-] Depreciation	C	18,000
Operating income	D = A + B - C	172,000
[-] Interest	E	15,000
Earnings before taxes	F = D - E	157,000
[-] taxes	G = F x 40%	62,800
Net income	H = F - G	94,200
[+] Depreciation	C	18,000
Operating Cash flow	H + C	112,200