Question

Domino Corporation is considering a 3-year project with an initial cost of $470,000. The project will not directly produce any sales but will reduce operating costs by $143,000 a year. The equipment is classified as MACRS 7-year property. The MACRS table values are .1429, .2449, .1749, .1249, .0893, .0892, .0893, and .0446 for Years 1 to 8, respectively. At the end of the project, the equipment will be sold for an estimated $223,000. The tax rate is 25 percent and the required return is 12 percent. An extra $30,000 of inventory will be required for the life of the project. What is the total cash flow for Year 3? (Hint: remember to recover NWC investment when project ends)

$240,719.50

$264,384.00

$295,764.50

$331,087.30

$376,433.50

Answer 1

$376,433.50

Step-1:Depreciation Schedule
Year	Cost	Depreciation rate	Depreciation	Accumulated Depreciation	Year end book Value
1	4,70,000.00	0.1429	67,163.00	67,163.00	4,02,837
2	4,70,000.00	0.2449	1,15,103.00	1,82,266.00	2,87,734
3	4,70,000.00	0.1749	82,203.00	2,64,469.00	2,05,531
Step-2:Calculation of year 3 total cash flow
Cash flow from operation		1,27,800.75
After Tax sale of asset		$             2,18,632.75
Release of net working Capital(Inventory)		30,000.00
Total Cash flow		3,76,433.50
Working:
# 1
Year		3
Saving in Expense		1,43,000.00
Depreciation		-82,203.00
Profit Before Tax		60,797.00
Tax Expense		-15,199.25
Net Income		45,597.75
Depreciation		82,203.00
Cash flow from operation		1,27,800.75
# 2
After Tax sale of asset	=	Sale Value at year end 3- (Sales Value at year end 3- Book Value at year end 3)*Tax Rate
	=	223000-(223000-205531)*25%
	=	$             2,18,632.75