Question

You are a part of a finance team in a firm, and you were asked by your boss to estimate the annual cash flows of a project. You estimated that the annual sales and costs of this project is $150,000 and $25,000 respectively. In order to start the project, the firm needs to invest in $300,000 in new equipment including shipping and installation, and $30,000 in working capital. The life of this asset is 3 years, and the project will be terminated after 3 years of operations. The equipment will depreciate via simplified straight-line method, and the estimated market value of the machine in 3 years is $20,000. The firm has a marginal tax rate of 22%.

1- What is the total annual cash flow of the first year of this project? Round to the nearest penny. Do not include a dollar sign in your answer.

2- What is the terminal cash flow of this project?

Thanks for the help!!

Answer 1

Time line		0	1	2	3
Cost of new machine		-300000
Initial working capital		-30000
=Initial Investment outlay		-330000
Sales			150000	150000	150000
Profits	Sales-variable cost		125000	125000	125000
-Depreciation	Cost of equipment/no. of years		-100000	-100000	-100000
=Pretax cash flows			25000	25000	25000
-taxes	=(Pretax cash flows)*(1-tax)		19500	19500	19500
+Depreciation			100000	100000	100000
=1. after tax operating cash flow			119500	119500	119500
reversal of working capital					30000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				15600
+Tax shield on salvage book value	=Salvage value * tax rate				0
=2. Terminal year after tax cash flows					45600