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Fluor Enterprise is considering a 3-year project with an initial cost of $336,000. The project will...

Fluor Enterprise is considering a 3-year project with an initial cost of $336,000. The project will not directly produce any sales but will reduce operating costs by $150,000 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 $151,000. The tax rate is 25 percent and the required return is 12 percent. An extra $22,000 of inventory will be required for the life of the project. What is the total cash flow for Year 3? $307,512.63 $299,174.80 $290,413.64 $313,416.76 $382,266.33

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Expert Solution

Time line 0 1 2 3
Cost of new machine -336000
Initial working capital -22000
=Initial Investment outlay -358000
7 years MACR rate 14.29% 24.49% 17.49% 43.73%
Savings 150000 150000 150000
-Depreciation =Cost of machine*MACR% -48014.4 -82286.4 -58766.4 146932.8 =Salvage Value
=Pretax cash flows 101985.6 67713.6 91233.6
-taxes =(Pretax cash flows)*(1-tax) 76489.2 50785.2 68425.2
+Depreciation 48014.4 82286.4 58766.4
=after tax operating cash flow 124503.6 133071.6 127191.6
reversal of working capital 22000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 113250
+Tax shield on salvage book value =Salvage value * tax rate 36733.2
=Terminal year after tax cash flows 171983.2
Total Cash flow for the period 299174.8

jeff jeffy answered 2 weeks ago
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