Question

Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed
assets, $160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt
is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project
has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of
the project. At the end of the project, the fixed assets can be sold for 25% of their original cost. The net
working capital returns to its original level at the end of the project. The project is expected to generate
annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is
15%.

1-What is the amount of the after-tax cash flow from the sale of the fixed assets at the end of this project?

2-What is the cash flow recovery from net working capital at the end of this project?

3-What is The Annual OCF? ( Please show your work in the sheet, NOT in the Excel and simple it ).

Answer 1

1. Answer: $ 52,812

Gross sale proceeds from sale of fixed asset after 5 years = $ 325,000 x 25 % = $ 81,250

Book value of the fixed asset after 5 years = $ 0

Gain on sale of fixed asset = $ 81,250 - $ 0 = $ 81,250

Tax effect of gain = $ 81,250 x 35 % = $ 28,438.

Therefore, amount of after-tax cash flow from sale of fixed assets = $ 81,250 - $ 28,438 = $ 52,812

2. Answer: $ 95,000.

3. Answer: $ 103,350.

Annual depreciation = $ 325,000 / 5 = $ 65,000

Annual EBITDA = $ 554,000 - $ 430,000 = $ 124,000

Annual OCF = EBITDA * ( 1 - t ) + Depreciation x t = $ 124,000* ( 1 - 0.35 ) + $ 65,000 x 0.35 = $ 80,600 + $ 22,750 = $ 103,350