Question

Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3 year tax life and would be fully depreciated by the MACRS method over 3 years, but it would have a positive pre-tax salvage value at the end of year 3, when the project would be closed down. Also, additional net operating working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3 year life. What is the project's operating cash flow in Year 2? Create a table. DO NOT USE EXCEL

-Net investment in fixed assests = $70,000

- Required net opertaing work capital = $15,000

-Depreciation (MACRS): 33% in year 1

45% in year 2

15% in year 3

7% in year 4

- Earnings before taxes & depreciation = $54,000

- Expected pre-tax salvage value = $6,000

- Tax Rate: 35%

- WACC: 8%

Answer 1

Answer is $46,912.50

Net investment in fixed assets = $70,000

Year 2:

Depreciation rate = 45%
Earnings before taxes and depreciation = $54,000
Tax rate = 35%

Depreciation expense = Depreciation rate * Net investment in fixed assets
Depreciation expense = 45% * $70,000
Depreciation expense = $33,750

Operating cash flow = (Earnings before taxes and depreciation - Depreciation expense) * (1 - tax) + Depreciation expense
Operating cash flow = ($54,000 - $33,750) * (1 - 0.35) + $33,750
Operating cash flow = $20,250 * 0.65 + $33,750
Operating cash flow = $46,912.50