Question

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 | $ |

Answer #1

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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