Question

A firm is considering an expansion project that will last three years. The project requires an immediate purchase of a new equipment that costs $900,000. The equipment will be fully depreciated using straight-line method over the next three years. The resale price of the equipment at the end of year three is estimated to be $200,000. The project will generate annual sales of $750,000 and incur annual costs (all costs except depreciation expense) of $200,000 for each of the next three years. The project requires an immediate investment of $50,000 in NWC, which will be fully recovered in year 3. The corporate tax rate is 30%.

Calculate the Cash Flow from Assets (Project Cash Flow) for the project for years 0, 1, 2, and 3.

Answer 1

Solution: Sales Less : costs Less : Depreciation Taxable income Less : tax at 30% Net income Add: Depreciation OCE Cost of equipment After tax sale value of equiment=200000*(1-0.3) Change in NWC Project cash flows o 1 2 3 750000 750000 750000 -200000 -200000 -200000 -300000-300000-300000 250000 250000 250000 -75000 75000 75000 175000 175000 175000 | 300000 300000 300000 475000 475000 475000 -900000 140000 -50000 50000 -950000 475000 475000 665000