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Serenity by Jan is considering expanding its operations. The expansion will require new equipment costing $750,000...
Serenity by Jan is considering expanding its operations. The expansion will require new equipment costing $750,000 that would be depreciation straightlin to zero over a 4 year life. The estimated after-tax proceeds on the sale this equipment is $124,000. The project requires an investment in net working capital of $40,000. The projected annaul operating cash flow is $230,000. Serenity by Jan's tax rate is 34%.
What are the annual cash flows for this project?
Year 0:
Year 1:
Year 2:
Year 3:
Year 4:
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Expert Solution
| Calculation of annual cash flows | |||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Cost of Equipment | -750,000 | ||||
| Investment in Working Capital | -40,000 | ||||
| Annual Operating cash flows | 230,000 | 230,000 | 230,000 | 230,000 | |
| Recovery of working capital | 40,000 | ||||
| After tax salvage value of equipment | 124,000 | ||||
| Annual cash flows | -790,000 | 230,000 | 230,000 | 230,000 | 394,000 |
| Note: Depreciation and tax costs are already considered in calculating annual operating cash flows, hence, no adjustment is required now |
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