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Company Q is considering a project which needs an equipment. The cost of the equipment is...

Company Q is considering a project which needs an equipment. The cost of the equipment is $350,000. This equipment will be depreciated for five years on a straight-line basis to zero-salvage value. The market value of the equipment at the end of the fifth year is $25,000. Initial investment in working capital is $22,000. Annual sales and operating costs (excluding depreciation) from this project are $175,000 and 93,000 respectively. Company pays tax at 40%. The annual operating cash flow from this project is: a. $75,200 b. $64,000 c. $62,000 d. $77,200The investment proportion in Stock Z and expected return on overall portfolio are: a) 16.00% and 16.16% respectively b) 84.00% and 16.16% respectively c) 84.00% and 15.12% respectively d) 16.00% and 15.12% respectively

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Answer #1

Annual Operating Cash Flow

Annual Operating Cash Flow is calculated by using the following formula

Annual Operating Cash Flow = [(Sales – Operating Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

Sales = $175,000

Operating Costs = $93,000

Depreciation Expense = $70,000 [$350,000 / 5 Years]

Therefore, the Annual Operating Cash Flow = [(Sales – Operating Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [($175,000 - $93,000) x (1 – 0.45)] + [$70,000 x 0.40]

= [$82,000 x 0.60] + [$70,000 x 0.40]

= $49,200 + $28,000

= $77,200

“Hence, the annual operating cash flow from this project is (d). $77,200”

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