Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $837,700.00 work cell. Further, it will cost the firm $59,400.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $73,500.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $6,100.00. Finally, the firm will invest $10,500.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $915,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 38.00%.

The work cell is estimated to have a market value of $453,000.00 at the end of the fourth year. The firm expects to reclaim 87.00% of the final NWC position.

The cost of capital is 13.00%.

What is the terminal cash flow for the project?

Answer 1

>>>>

Purchase Cost of Work Cell = Work Cell cost + Delivery and installation cost of work cell

= $837,700.00 + $59,400.00

= $897,100

>>>>

Depreciation = Purchase Cost of Work Cel / 20 years

= $897,100 / 20 years

= $44,855

>>>>

Book value at teh end of 4th year = Purchase cost of Work Cell - Depreciation for 4 years

= $897,100 - (4 * $44,855)

= $717,680

>>>>

Calculation of Net Terminal value of Work Cell

Recovery of Working Capital = $10,500.00 * 87% = $9,135.00

>>>>

Terminal cash flow of the project = Net Terminal value of sale + Recovery of Working Capital

= $553,578.40 + $9,135.00

= $562,713.40

Terminal Cash Flow of the project is $562,713.40