Question

The project requires an initial investment of $300,000 on equipment and is depreciated over 6 years. Working capital increased $18,000 at the beginning of the project and will be recovered in full at the end of year 4. The equipment will be sold at its book value at the end of year 4. The tax rate is 40%.

	1	2	3	4
Revenues	$120,000	$140,000	$160,000	$180,000
Cost of Goods Sold	$  36,000	$  42,000	$  48,000	$  54,000
Depreciation	$  80,000	$  60,000	$  40,000	$  20,000
EBIT	$    4,000	$  38,000	$  72,000	$106,000

What is the TOTAL net cash flow to the firm in year 4?

Group of answer choices

A) $63,600

B) $83,600

C) $81,600

D) $183,600

E) $201,600

Answer 1

Total depreciation = $80000+60000+40000+20000 =$200000
Book value = $300000-200000 =$100000
Cash flow for year 4
EBIT	$       1,06,000
Less:tax at 40%	$           42,400
After -Tax Earning	$           63,600
Add: Depreciation	$           20,000
Cash Flow from operation	$           83,600
Add: Working capital release	$           18,000
Add: Sale value of equipment	$       1,00,000
Cash flow for year 4	$       2,01,600
Correct Option :E) $201,600