Question

Outback Beverages is considering a project for a new beverage called the Wicked Wombat. The project would require new assets today costing $100,000 that would be depreciated using 3-year MACRS Depreciation (yr 1: 33%, yr 2: 45%, yr 3: 15%, yr 4: 7%). Additional net working capital of $6,000 would be needed at the beginning of the project’s life. The project has a 4-year expected useful life with an expected salvage value of $20,000 at the end of the 4-year expected useful life. Outback expects Wicked Wombat annual sales of $75,000 and annual operating costs of $25,000 during the 4-year life of the project. Outback Beverages marginal tax rate is 25% and their WACC is 10%.

What is the terminal cash flow at the end of year 4 for the Wicked Wombat project?

Answer 1

Terminal cash flow = After-tax proceeds from disposal of assets + Working capital recovery

                              = (Salvage value – Book value) x (1-Tax rate) + Working capital recovery

                              = ($ 20,000 - $ 0) x (1-0.25) + $ 6,000

                              = ($ 20,000 x 0.75) + $ 6,000

                              = $ 15,000 + $ 6,000 = $ 21,000

Terminal cash flow at the end of year 4 for the Wicked Wombat Project is $ 21,000