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.

Answer 1

Cashflows of Year-3
Annual Revenues (13000*(1.06)^2)				14606.8
Less: Variable cost (14606.8*30%)				4382.04
Less: Fixed cost				0
lEss: Depreciation (20000-4000)/3				5333.33
Before Tax Income				4891.43
Less: Tax @ 40%				1956.57
After Tax Income				2934.86
Add: Dep				5333.33
Operating cashflows					8268.19
Salvage value released					4000
WC released					2000
Total Cashflows of Year-3					14268.19
Answer is   $ 14268.19