You are a part of a finance team in a firm, and you were asked by...

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You are a part of a finance team in a firm, and you were askedby your boss to estimate the annual cash flows of a project. Youestimated 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 includingshipping and installation, and $30,000 in working capital. The lifeof this asset is 3 years, and the project will be terminated after3 years of operations. The equipment will depreciate via simplifiedstraight-line method, and the estimated market value of the machinein 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 thisproject? Round to the nearest penny. Do not include a dollar signin your answer.
2- What is the terminal cash flow of this project?
Thanks for the help!!

Answer & Explanation Solved by verified expert

3.9 Ratings (573 Votes)

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

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Transcribed Image Text

You are a part of a finance team in a firm, and you were askedby your boss to estimate the annual cash flows of a project. Youestimated 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 includingshipping and installation, and $30,000 in working capital. The lifeof this asset is 3 years, and the project will be terminated after3 years of operations. The equipment will depreciate via simplifiedstraight-line method, and the estimated market value of the machinein 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 thisproject? Round to the nearest penny. Do not include a dollar signin your answer.2- What is the terminal cash flow of this project?Thanks for the help!!