Question

LO, Inc., is considering an investment of $444,000 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 $283,100 and $88,800, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 2 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 $64,000 in nominal terms at that time. The one-time net working capital investment of $19,500 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? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Year 0
Year 1
Year 2
Year 3
Year 4
Year 5

Answer 1

Ans )

Year 0	-463500
Year 1	168980
Year 2	171933
Year 3	174946
Year 4	178018
Year 5	249293

Please see calculation.

Depreciation Method = SLM with zero value at the end of year five.

Annual Depreciation = Cost / No of Year = 444000/5 = 88800

After Tax Salvage from Equipment Disposal = Salvage Value – Tax (Salvage Value – Book Value)

Salvage Value = 64000

Tax Rate = 24%

Book Value = 0 (As mentioned in question)

After Tax Salvage from Equipment Disposal = 64000 – 0.24 ( 64000 – 0) = 48640

		0	1	2	3	4	5
1	Cost	-444000.00
2	Revenue		283100.00	288762.00	294537.24	300427.98	306436.54
3	Exp		88800.00	90576.00	92387.52	94235.27	96119.98
4	Depreciation SLM		88800.00	88800.00	88800.00	88800.00	88800.00
5	Income before tax (2-3-4)		105500.00	109386.00	113349.72	117392.71	121516.57
6	Tax @ 24%		25320.00	26252.64	27203.93	28174.25	29163.98
7	Income after tax (5-6)		80180.00	83133.36	86145.79	89218.46	92352.59
8	Cash Flow from Operation (7+4)		168980.00	171933.36	174945.79	178018.46	181152.59
9	Change in Working Capital	-19500.00					19500.00
10	After Tax Salvage from Equipment Disposal						48640.00
11	Total Cash Flow (1+8+9+10)	-463500.00	168980.00	171933.36	174945.79	178018.46	249292.59

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