Question

Etonic Inc. is considering an investment of $375,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $255,000 and $80,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 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 $55,000 in nominal terms at that time. The one-time net working capital investment of $15,000 is required immediately and will be recovered at the end of the project. The corporate tax rate is 38 percent.

  

What is the project’s total nominal cash flow from assets for each year? (A negative answers should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

  

	Cash flow
Year 0	$
Year 1	$
Year 2	$
Year 3	$
Year 4	$
Year 5	$

Answer 1

Given,

Investment = $ 375000

Net working capital = $ 15000

Salvage value = $ 55000

Corporate tax rate = 38% or 0.38

Annual inflation rate = 3%

Solution :-

		year 1	year 2	year 3	year 4	year 5
A: Revenues		255000	262650	270530	278645	287005
B: Expenses		80000	82400	84872	87418	90041
C: Depreciation		64000	64000	64000	64000	64000
D: EBIT	A-B-C	111000	116250	121658	127227	132964
E: Tax@ 38%	D*0.38	42180	44175	46230	48346	50526
F: Net income	D-E	68820	72075	75428	78881	82438
G: Recovery of net working capital						15000
H: After tax salvage value						34100
I: Depreciation		64000	64000	64000	64000	64000
Nominal Cash flows	F+G+H+I	132820	136075	139428	142881	195538