Question

LO, Inc., is considering an investment of $438,000 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 $277,700 and $87,600, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 4 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 $58,000 in nominal terms at that time. The one-time net working capital investment of $16,500 is required immediately and will be recovered at the end of the project. The corporate tax rate is 23 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.)

Answer 1

Statement showing Nominal cash flow

Particulars	0	1	2	3	4	5
Cost of asset	-438000
WC requirement	-16500
Nominal annual revenue		277700.00	288808.00	300360.32	312374.73	324869.72
Less:
Nominal annual expense		87600.00	91104.00	94748.16	98538.09	102479.61
Depreciation		87600.00	87600.00	87600.00	87600.00	87600.00
PBT		102500.00	110104.00	118012.16	126236.65	134790.11
Tax @ 23%		23575.00	25323.92	27142.80	29034.43	31001.73
PAT		78925.00	84780.08	90869.36	97202.22	103788.39
Add: Depreciation		87600.00	87600.00	87600.00	87600.00	87600.00
Annual Cash flow		166525.00	172380.08	178469.36	184802.22	191388.39
Salvage value of machine (58000(0.77))						44660
WC released						16500
Total nominal cash flow	-454500	166525.00	172380.08	178469.36	184802.22	252548.39