Question

Problem 16

Large Manufacturing, Inc. is considering investing in some new equipment whose data are shown below. The equipment has a 3-year class life and will be depreciated by the MACRS depreciation system, and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the project's Initial Cash Outlay at time 0? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box. WACC 11.0% Net investment in fixed assets (depreciable basis) $70,000 Required new working capital $10,000 Sales revenues, each year $95,000 Cash operating costs excl. depr'n, each year $30,000 Expected pretax salvage value $9,000 Tax rate 30.0%

80000

Using the information from problem 16 on Large Manufacturing, Inc., what is the

Terminal Year Non–Operating Cash Flow at the end of Year 3? Enter your answer

rounded to two decimal places. Do not enter $ or comma in the answer box. For

example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Terminal year non operating cash flow will comprise of:

• Post tax salvage value
• Release of working capital

Pre tax salvage value = 9,000

Book value at the end of 3 years under 3 years MACRS depreciation plan = 7.41% = 7.41% x 70,000 = $  5,187.00

Hence, gain on sale = 9,000 -  5,187.00 =  3,813.00

Hence, post tax salvage value = Pre tax salvage value - tax on gain on sale = 9,000 - 30% x 3,813 =  7,856.10

Release of working capital = $ 10,000

Terminal year non operating cash flow = Post tax salvage value + Release of working capital = 7,856.10 + 10,000 = 17,856.10