Question

LO, Inc., is considering an investment of $454,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $292,100 and $90,800, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 4 percent. The company will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $74,000 in nominal terms at that time. The one-time net working capital investment of $24,500 is required immediately and will be recovered at the end of the project. The corporate tax rate is 24 percent. What is the project's total nominal cash flow from assets for each year? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Cash flow -478,500 Year 0 S Year 1 Year 2 Year 3 Year 4 Year 5

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B C / D E F G H I Year-1 Year-2 Year-3 Year-4 Year-5 Initial cost of Asset Initial NWC required Year-0 -$454,000 -$24,500 8 Revenue Expenses Depreciation EBIT Tax(24%) Net Income $292,100 $90,800 $90,800 $110,500 $26,520 $83,980 $303,784 $94,432 $90,800 $118,552 $28,452 $90,100 $315,935 $98,209 $90,800 $126,926 $30,462 $96,464 $328,573 $102,138 $90,800 $135,635 $32,552 $103,083 $341,716 $106,223 $90,800 $144,6931 $34,726 $109,9661 10 11 12 13 $174,780 $180,900 $187,264 $193,883 15 Operating Cash Flow NWC recovered After tax salvage value Total Nominal Cash Flow $200,766 $24,500 $56,240 $281,506 $478,500 $174,780 $180,900 $187,264 $193,883

Cell reference -

ДА B I c E F G H Year-1 Year-2 Year-3 Year-4 Year-5 Initial cost of Asset Initial NWC required Year-0 -454000 -24500 Revenue Expenses Depreciation EBIT Tax(24%) Net Income 292100 90800 = $C$3/5 =D6-D7-08 =D9*0.24 =D9-D10 =D6*1.04 =D7*1.04 =-$C$3/5 =E6-E7-E8 =E9*0.24 =E9-E10 =E6*1.04 =E7*1.04 = $C$3/5 =F6-F7-F8 =F9*0.24 |=F9-F10 =F6*1.04 =F7*1.04 =-$C$3/5 =G6-67-68 =G9*0.24 =G9-610 =G6*1.04 =G7*1.04 --$C$3/5 =H6-H7-H8 =H9*0.24 =H9-H10 --C4 15 Operating Cash Flow =D11+D8 =E11+E8 |=F11+F8 =G11+G8 =H11+H8 NWC recovered After tax salvage value =74000*(1-0.24) Total Nominal Cash Flow =C3+C4 =SUM(D13:D15) =SUM(E13:E15) =SUM(F13:F15) =SUM(G13:G15) =SUM(H13:H15)

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.