Question

You are a project manager. You are estimating cash flows of a potential project that requires investment of $250,000 in a machine, including installation cost, and $40,000 in working capital which will be fully captures at the end of the project. The marchine has the estimated life of 5 years and will be depreciated vie simplified straight-line method. The project is expected to raise the firm's revenues by $330,000 and costs by $125,000 annually. Since the trend of the product moves rapidly, you expect to terminate this project in 3 years. In 3 years, the machine you purchase for the project can be sold for $50,000. The firm has the marginal tax rate of 34%. What is the terminal value of the project? Round to the nearest penny. Do not include a dollar sign in your answer.

Answer 1

Particulars

Investment 250000

Working capital - 40000

Depreciation straight line- 5 year life

Yearly depreciation - 50000

Scrap value at year end three-50000

So net capital loss - 250000- 150000-50000

= 50000

Particulars year1 year2 year3 Total

Cash inflow 330000 33000 33000

Operations cost 125000 125000 125000

Contributions 205000 20500 205000

Less depreciation 50000 50000 50000

EBIT 155000 155000 155000

Tax 34% 52700 52700 52700

EAT 102309 102309 102300

Add tax on capital loss (50000*.34) 17000

Less wc recovery : 40000

Add depreciation 50000 50000 500000

Add scrap at year end 3 50000

Free cash flow 152300 152300 179300 483900

Cash out flow (250000+40000)-290000

Net terminal value of the otiject 193900

It shows a positive value