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LO, Inc., is considering an investment of $447,000 in an asset with an economic life of...

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Finance

LO, Inc., is considering an investment of $447,000 in an assetwith an economic life of five years. The firm estimates that thenominal annual cash revenues and expenses at the end of the firstyear will be $285,800 and $89,400, respectively. Both revenues andexpenses will grow thereafter at the annual inflation rate of 5percent. The company will use the straight-line method todepreciate its asset to zero over five years. The salvage value ofthe asset is estimated to be $67,000 in nominal terms at that time.The one-time net working capital investment of $21,000 is requiredimmediately and will be recovered at the end of the project. Thecorporate tax rate is 22 percent. What is the project’s totalnominal cash flow from assets for each year?

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3.7 Ratings (461 Votes)

0 1 2 3 4 5
Nominal annual cash revenues $   2,85,800 $    3,00,090 $   3,15,095 $    3,30,849 $   3,47,392
Nominal annual cash expenses $       89,400 93870 98564 103492 108666
Depreciation [447000/5] $       89,400 $       89,400 $      89,400 $       89,400 $      89,400
Net operating income $   1,96,400 $    2,10,690 $   2,25,695 $    2,41,449 $   2,57,992
Tax at 22% $       43,208 $       46,352 $      49,653 $       53,119 $      56,758
Net operating income after tax $   1,53,192 $    1,64,338 $   1,76,042 $    1,88,330 $   2,01,234
Add: Depreciation $       89,400 $       89,400 $      89,400 $       89,400 $      89,400
Operating cash flow $   2,42,592 $    2,53,738 $   2,65,442 $    2,77,730 $   2,90,634
Initial capital expenditure $       4,47,000
Increase in NWC $          21,000
After tax salvage value = 67000*(1-22%) = $      58,960
Recovery of NWC $      21,000
Nominal cash flow from assets $     -4,68,000 $   2,42,592 $    2,53,738 $   2,65,442 $    2,77,730 $   3,70,594

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