Question

LO, Inc., is considering an investment of $441,000 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 $280,400 and $88,200, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 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 $61,000 in nominal terms at that time. The one-time net working capital investment of $18,000 is required immediately and will be recovered at the end of the project. The corporate tax rate is 21 percent.

  

What is the project’s total nominal cash flow from assets for each year?

Answer 1

Solution :

The project’s total nominal cash flow from assets for each year

Cash outflow Year 0 : = Initial Investment + Initial Net working capital introduced = $ 441,000 + $ 18,000 = - $ 459,000

Year 1 = $ 170,360

Year 2 = $ 174,915.14

Year 3 = $ 179,606.93

Year 4 = $ 184,439.48

Year 5 = Cash Flow year 5 + Initial Net working capital recouped + Salvage value

= $ 189,417 + $ 18,000 + $ 48,190 = $ 255,607.01

Please find attached the screenshot of the excel sheet containing the detailed calculation for the above solution .

Also find attached the screenshot of the excel sheet containing the formulas used for the calculation.