You are evaluating a project with a 4 year life. Sales revenueis projected to be $320,000 in year 1, $400,000 in year 2, $424,000in year 3, and $475,000 in year 4. Operating expenses (excludingdepreciation) are $200,000 per year. The project requires aninitial investment in equipment of $240,000 which will bedepreciated straight-line to zero over its four-year life. However,the actual market value of the equipment at the end of year 4 isexpected to be $23,000. The level of net working capital requiredin each year is projected to be 10% of sales in the following year.The tax rate is 40% and the required return on the project is15%.
(a) What is operating cash flow in the secondyear (t=2) of the project? Show all your work and clearlyidentify your final answer. (25 points)
(b) What is the investment in net working capital in the thirdyear (t=3) of the project? Indicate clearly whether this would be apositive or negative number in your cash flow worksheet. Showall your work and clearly identify your final answer. (25points)
(c) What is the after-tax cash flow from the sale of theequipment in year 4? Show all your work and clearly identifyyour final answer. (25 points)
