Question

Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and cash operating expenses are expected to be constant over the project's 5 year expected operating life; annual sales revenue is $95,000.00 and cash operating expenses are $37,500.00. The new equipment's cost and depreciable basis is $135,000.00 and it will be depreciated by MACRS as 5 year property. The new equipment replaces older equipment that is fully depreciated but can be sold for $7,500. In addition, the new equipment requires an additional $5,000 of net operating working capital, which can be fully recovered at the end of the project. The new equipment is expected to be sold for $10,995 at the end of the project in year 5. The marginal tax rate is 28.00%.

What is the Year 5 Net Operating Cash Flow?

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-135000
Initial working capital		-5000
=Initial Investment outlay		-140000
5 years MACR rate			20.00%	32.00%	19.20%	11.52%	11.52%
Sales			95000	95000	95000	95000	95000
Profits	Sales-variable cost		57500	57500	57500	57500	57500
-Depreciation	=Cost of machine*MACR%		-27000	-43200	-25920	-15552	-15552
=Pretax cash flows			30500	14300	31580	41948	41948
-taxes	=(Pretax cash flows)*(1-tax)		21960	10296	22737.6	30202.56	30202.56
+Depreciation			27000	43200	25920	15552	15552
=after tax operating cash flow			48960	53496	48657.6	45754.56	45754.56