Question

the mills wheel is considering a 3 year project that will require 289,400 fixed assets. current assets are expected to increase 64500 dollars and current liabilities will go up 16500 dollars. fixed assets will be depreciated straight line to 0 book value over 5 years. at the end of the project, the fixed assets can be sold 20% of the orginal cost snd the net worling captal will return to its original level. the project is expected to generate annual sales of 275000 dollars and costs of 198000 dollars. the tax rate is 34% and the required return rate is 16%. what is the intial investment at time 0 for the project?

2. what is the annual operating cash flow for the project?

3. what is the terminal cash flow for the project

Answer 1

Time line		0	1	2	3
Cost of new machine		-289400
Initial working capital		-48000
=1. Initial Investment outlay		-337400
						100.00%
Sales			275000	275000	275000
Profits	Sales-variable cost		77000	77000	77000
-Depreciation	Cost of equipment/no. of years		-57880	-57880	-57880	115760	=Salvage Value
=Pretax cash flows			19120	19120	19120
-taxes	=(Pretax cash flows)*(1-tax)		12619.2	12619.2	12619.2
+Depreciation			57880	57880	57880
=2. after tax operating cash flow			70499.2	70499.2	70499.2
reversal of working capital					48000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				38200.8
+Tax shield on salvage book value	=Salvage value * tax rate				39358.4
=3. Terminal year after tax cash flows					125559.2