Question

A four-year project has cash flows before taxes and depreciation of $12,000 per year. The project requires the purchase of a $50,000 asset that will be depreciated over five years, straight line. At the end of the fourth year the asset will be sold for $18,000. The firm's marginal tax rate is 35%. Calculate the cash flows associated with the project. (For convenience assume the gain on the sale of the asset is taxed at 35%.)

I gave you the calculation on the gain on the sale plus some check points in the cash flow

SOLUTION:

            Disposal:   Sale Price                $18,000                       $18,000

                                           NBV of asset            $10,000

                                            Gain                       $ 8,000

                                             Tax                           (2,800)                         (2,800)

                                             Net from sale                                                 $15,200

                                                                      CASH FLOWS

                                         0                      1                      2                       3                     4     

     Asset                   -50,000

     Income                                                                                                                    12,000

     Depreciation                                    10,000   

     EBT Contribution                    

     Tax                                                     ()               -700                   ()               (   )

     Net Income Contribution               

     Add Back Depreciation                  $10,000           $10,000           $10,000           $10,000

     Annual Cash Flow                         

     Sale of Asset                                                                                                           $15,200                 

     Net Cash Flow:

Answer 1

Statement showing net cash flow

Particulars	0	1	2	3	4
Purchase price of asset	-50000
Cash flow before depreciation and tax		12000	12000	12000	12000
Depreciation = 50000/5 =10,000		10000	10000	10000	10000
PBT		2000	2000	2000	2000
Tax @ 35%		-700	-700	-700	-700
PAT		1300	1300	1300	1300
Add: Depreciation		10000	10000	10000	10000
Annual Cash flow		11300	11300	11300	11300
Salvage value ( Note 1)					15200
Net cash flow	-50000	11300	11300	11300	26500

Not 1) Salvage value

Particulars	Amount
Selling price of asset	18000
Less book value(50,000-40,000)	10000
Profit	8000
Tax @ 35%	2800
Salvage value = 18000-2800	15200