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 project’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