Question

A firm is considering a project that requires a time t=0 cash outlay of $100,000 for a piece of equipment. The firm will depreciate this equipment to zero via straight line depreciation over an eight year economic life. The project will require the purchase of an additional $8,000 of inventory at time t=0. The inventory purchase will result in an account payable of $3,500 at time t=0. The firm's tax rate is 40%. What is the net cash flow at time t=0?

A. $60,000

B. $62,100

C. $64,800

D. $67,500

E. $100,000

F. $103,500

G. $108,000

H. $112,500

I. None of the above is within $100 of the net cash flow at time t-0.

Answer 1

a) Calculation of net cash flow associated with the project at time t=0 are as follow :

Initial purchase cost of equipment = $100,000
Increase in Net Working Capital = Increase in Inventories – Increase in Account Payable
                                            = $8,000 - $3,500
                                                              = $4,500

Net cash flow at t-0   = Initial purchase cost + Increase in Net Working Capital
                          = $100,000 + 4,500
                          = $104,500

Option I. is correct. None of the above answers are within $100 of the net cash flow at time t-0