Question

You are considering the following project. What is the expected cash flow for the last year (year 3)? This cash flow includes operating cash flow and terminal cash flow. Project life: 3 years Equipment: Cost: $20,000 Economic life: 3 years Salvage value: $4,000 Initial investment in net working capital: $2,000 Revenue: $13,000 in year 1, with a nominal growth rate of 6% per year Fixed cost: $3,000 in year 1 Variable cost: 30% of revenue Corporate tax rate (T): 40% WACC for the project: 10% This project does not create incidental effect.

a. $12,492.91

b. $12,315.76

c. $12,334.09

d. $12,470.09

e. $12,459.31

Answer 1

Cashflows of Year-3
Revenue (13000 * (1.06)^2)			14606.8
Less: Variable cost @30%			4382.04
Less: Fixed cost			3000
Less: Depreciation			5333.33
(20000-4000)/3
Net Income			1891.43
less: Tax @ 40%			756.57
After Tax Income			1134.86
Add: Depreciation			5333.33
Operating Cashflows				6468.19
Salvage value of investment				4000
Release of WC				2000
Cashflows of Year-3				12468.19
Answer is d. 12470.09