Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $833,800.00 work cell. Further, it will cost the firm $53,200.00 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 $74,800.00. 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 $7,400.00. Finally, the firm will invest $10,000.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $903,000.00 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 $478,000.00 at the end of the fourth year. The firm expects to reclaim 83.00% of the final NWC position.

The cost of capital is 14.00%.

What is the yearly operating cash flow for the project?

Answer 1

Here I have assumed that there is no Capita Gain tax on the sale of machinery and WC.

Though not asked, I have calculated the NPV

Intitial Investment
Cost of Machine	8,33,800
Installation Charges	53,200
Total Cost to be Depreciated	8,87,000
Life of Machine in years	20
Annual Depreciation (totol cost/No of years)	44,350
Investment in Working Capital	10,000
			1	2	3	4
		Year 0	Year 1	Year 2	Year 3	Year 4
Total Sales			$   9,03,000	$ 9,03,000	$ 9,03,000	$ 9,03,000
Less: Expenses as percentage of sales	40%		$   3,61,200	$ 3,61,200	$ 3,61,200	$ 3,61,200
Less: Depreciation			$      44,350	$     44,350	$     44,350	$     44,350
Profit Before tax			$   4,97,450	$ 4,97,450	$ 4,97,450	$ 4,97,450
Less:tax	38%		$   1,89,031	$ 1,89,031	$ 1,89,031	$ 1,89,031
Profit After Tax			$   3,08,419	$ 3,08,419	$ 3,08,419	$ 3,08,419
Add: Depreciation			$      44,350	$     44,350	$     44,350	$     44,350
Less: Investment in Machine		$   8,87,000	0	$              -	$              -	$              -
Less: Investment in WC		$       10,000	0	$              -	$              -	$              -
Add: Sale of Machine			$                -	$              -	$              -	$ 4,78,000
Add: Release of WC			$                -	$              -	$              -	$       8,300
Net Cash Inflow		$ -8,97,000	$   3,52,769	$ 3,52,769	$ 3,52,769	$ 8,39,069
Present Value of cash Flow @14%	14%	$ -8,97,000	$   3,09,446	$ 2,71,444	$ 2,38,109	$ 4,96,796
NPV		$   4,18,796