Question

can someone please explain with formulas and all work shown? i rate! :)

A project has an operating cash flow of $33,000. Initially, this 4-year project required $5,600 in net working capital, which is recoverable when the project ends. The firm also spent $16,400 on equipment to start the project. This equipment will have a book value of $2,800 at the end of year 4. What is the cash flow for year 4 of the project if the equipment can be sold for $4,500 and the tax rate is 35 percent?

Answer 1

Answer to Question 1:

Initial Investment = $16,400
Residual Value = $2,800
Useful Life = 4 years

Annual Depreciation = (Initial Investment - Residual Value) / Useful Life
Annual Depreciation = ($16,400 - $2,800) / 4
Annual Depreciation = $3,400

Initial Investment in NWC = $5,600

Salvage Value = $4,500

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * Tax Rate
After-tax Salvage Value = $4,500 - ($4,500 - $2,800) * 0.35
After-tax Salvage Value = $4,500 - $595
After-tax Salvage Value = $3,905

Annual Operating Cash Flow = $33,000

Year 4:

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $33,000 + $5,600 + $3,905
Net Cash Flows = $42,505