Question

- PDQ Corporation is considering an investment proposal that
requires an initial investment of $100,000 in equipment. Fully
depreciated existing equipment may be disposed of for $30,000
pre-tax. The proposed project will have a five-year life, and is
expected to produce additional revenue of $45,000 per year.
Expenses other than depreciation will be $12,000 per year. The new
equipment will be depreciated to zero over the five-year useful
life, but it is expected to actually be sold for $25,000. PDQ has a
40% tax rate.
- What is the net initial outlay for the proposed project?
- What is the annual (operating) cash flow for years 1-4?
- What is the total cash flow at the end of year five (operating cash flow for year 5 plus terminal cash flow)?

Answer #1

1.Net initial outlay=initial investment-(existing equipment value*(1-tax rate))

=100,000-(30,000*(1-40%))=$100,000-$18,000

Net Initial outlay=$82,000

2 & 3. I have given procedure in the below sheet. Please look into it.

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