Question

# Etonic Inc. is considering an investment of \$382,000 in an asset with an economic life of...

Etonic Inc. is considering an investment of \$382,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be \$262,000 and \$87,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 2 percent. Etonic will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be \$62,000 in nominal terms at that time. The one-time net working capital investment of \$18,500 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34 percent tax rate.

 What is the projectâ€™s total nominal cash flow from assets for each year? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

 Cash flow Year 0 \$ Year 1 \$ Year 2 \$ Year 3 \$ Year 4 \$ Year 5 \$

 Time line 0 1 2 3 4 5 Cost of new machine -382000 Initial working capital -18500 =Initial Investment outlay -400500 100.00% Sales 262000 267240 272584.8 278036.5 283597.23 Profits Sales-variable cost 175000 178500 182070 185711.4 189425.63 -Depreciation Cost of equipment/no. of years -76400 -76400 -76400 -76400 -76400 0 =Salvage Value =Pretax cash flows 98600 102100 105670 109311.4 113025.63 -taxes =(Pretax cash flows)*(1-tax) 65076 67386 69742.2 72145.524 74596.914 +Depreciation 76400 76400 76400 76400 76400 =after tax operating cash flow 141476 143786 146142.2 148545.52 150996.91 reversal of working capital 18500 +Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 40920 +Tax shield on salvage book value =Salvage value * tax rate 0 =Terminal year after tax cash flows 59420 Total Cash flow for the period -400500 141476 143786 146142.2 148545.52 210416.91

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