Question

Thornley Co. is considering a 3-year project with an initial cost of $636,000. The equipment is classified as MACRS 7-year property. The MACRS table values are 0.1429, 0.2449, 0.1749, 0.1249, 0.0893, 0.0892, 0.0893, and 0.0446 for Years 1 to 8, respectively. At the end of the project, the equipment will be sold for an estimated $279,000. The tax rate is 35 percent, and the required return is 17 percent. An extra $23,000 of inventory will be required for the life of the project. Annual sales are estimated at $379,000 with costs of $247,000. What is the total cash flow for Year 3? Multiple Choice $406,208.19 $281,782.87 $423,008.24 $319,208.19 $315,189.32

Answer 1

Cash Flow in Year 3 = EAT + Depreciation + After-tax salvage value of equipment + Recovered Inventory

Depreciation

Depreciation = 636,000 x 0.1749 = $111,236.4

Net Income

(A) Sales= $379,000

(B) Cost Of Sales = $247,000

(C) Depreciation = $111,236.4

(D) Earnings Before Tax (EBT) = $20,763.6

(E) Tax @ 35% = $7267.26

(F) Earnings After Tax (EAT) = $13,496.34

After-Tax Salvage Value Of Equipment

Book value of equipment after 3 years = 636,000 x (1 - (0.1429 + 0.2449 + 0.1749)) = $278,122.80

After-tax salvage value = (279,000 - 278,122.80) x (-35%) + 279,000 = $278,692.98

Inventory Recovered

Inventory Recovered - $23,000

Therefore,

Cash flows = 13,496.34 + 111,236.40 + 278,692.98 + 23,000 = $426,425.72