EVO, Inc. is evaluating a project that will have a life of four years. The operating cash flow each year is expected to be $47,000. There is a need to invest in net working capital at the start of the project in the amount of $3,800. EVO, Inc. will recover this investment in net working capital at the end of the project. EVO also needed to spend $21,500 on equipment in order to get the project started. The book value for this equipment when the project is finished, is estimated to be $4,300. This equipment will be sold at the end of the project for an estimated sales price of $5,400. EVO has a tax rate relevant to this analysis of 34 percent. Calculate the amount of cash flow in year 4 of this project?
| Profitability calculation in year 4 for computation of taxable outflows | Amount ($) |
| Operating Cash flow | $47,000.00 |
| Add: Recovering of investment in net working capital | $3,800.00 |
| Add: Profit on sale of equipment (5400-4300) | $1,100.00 |
| Less: Depreciation of equipment (21500-4300)/4 | $4,300.00 |
| Profit before tax | $47,600.00 |
| Less: Tax @ 34% | $16,184.00 |
| Net profit | $31,416.00 |
| Computation of cash flow in year 4 | Amount ($) |
| Operating Cash flow | $47,000.00 |
| Add: Recovering of investment in net working capital | $3,800.00 |
| Add: Depreciation addback | $4,300.00 |
| Add: Sale of equipment | $5,400.00 |
| Less: Tax outflows | $16,184.00 |
| Cash flow in year 4 | $44,316.00 |
As per the above calculations, it is evidenced that the cash flow of the project in year 4 is $44,316.
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