Question

A project has an annual operating cash flow of $23,700. Initially, this 4-year project required $3,800 in net working capital, which is recoverable when the project ends in year 4. The firm also spent $20,500 on equipment to start the project. This equipment will have a zero book value at the end of year 4. What is the net project cash flow from the asset (or free cash flow) for year 4 if the equipment can be sold for $4,300 and the tax rate is 40 percent?

Answer 1

Net Project cashflow from the asset = $ 61,682
(assuming the MARR rate to be 10%)
Year	Initial Investment	Annual Cashflow	Working Capital	Salvage Value after tax	Tax savings on depreciation	Total Cashflow	PVF @ 10%	NPV
0	(20,500)		(3,800)			(24,300)	1.0000	(24,300)
1		23,700			2050	25,750	0.9091	23,409
2		23,700			2050	25,750	0.8264	21,281
3		23,700			2050	25,750	0.7513	19,346
4		23,700	3,800	2,580	2050	32,130	0.6830	21,945
								61,682
Calculation of gain or loss on sale
Book Value of equipment at Year 4	-
Sale Value		4,300
Gain on Sale		4,300
Less: Tax @ 40%		1,720
Salvage value after tax		2,580
Calculation of tax savings on depreciation
Equipment cost		20,500
Life			4 years
Depreciation (20,500/4		5,125
Tax savings on depreciation (5125*40%)	2,050