Question

LO, Inc., is considering an investment of $436,000 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 $275,900 and $87,200, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 2 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 $56,000 in nominal terms at that time. The one-time net working capital investment of $15,500 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? (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

Solution :

The project's total nominal cash flow from assets for each year is as follows :

Year 0 : - Initial Investment - Initial Net Working Capital

= - $ 436,000 - $ 15,500 = - $ 451,500

Year 1 = $ 167,385

Year 2 = $ 170,366

Year 3 = $ 173,408

Year 4 = $ 176,509

Year 5 = $ 179,673 + $ 15,500 + $ 44,240 = $ 239,413

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

Please find the attached screenshot of the excel sheet containing the formulas used in the calculation.