Question

ABC, Inc. purchased an equipment at time=0 for $45,336. The shipping and installation costs were $5,609. The equipment is classified as a 5-year MACRS property. The investment in net working capital at time=0 was $11,997 which would be recouped at the end of the project. The project life is four years. At the end of the fourth year, the company will sell the equipment for $10,406. The annual cash flows are $34,514. What is the cash flow of the project in Year 4? That is, solve for CF₄. Assume that the tax rate is 15%

The MACRS allowance percentages are as follows, starting with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

Note: In the last year of the project, the Total Cash Flow = Operating Cash Flow + Terminal Cash Flow

Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box.

Answer 1

Initial Investment = Cost of Equipment + Shipping and Installation Cost
Initial Investment = $45,336 + $5,609
Initial Investment = $50,945

Useful Life = 5 years

Depreciation Year 1 = 20.00% * $50,945
Depreciation Year 1 = $10,189

Depreciation Year 2 = 32.00% * $50,945
Depreciation Year 2 = $16,302.40

Depreciation Year 3 = 19.20% * $50,945
Depreciation Year 3 = $9,781.44

Depreciation Year 4 = 11.52% * $50,945
Depreciation Year 4 = $5,868.864

Book Value at the end of Year 4 = $50,945 - $10,189 - $16,302.40 - $9,781.44 - $5,868.864
Book Value at the end of Year 4 = $8,803.296

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $10,406 - ($10,406 - $8,803.296) * 0.15
After-tax Salvage Value = $10,165.59

Initial Investment in NWC = $11,997

Year 4:

Terminal Cash Flows = NWC recovered + After-tax Salvage Value
Terminal Cash Flows = $11,997 + $10,165.59
Terminal Cash Flows = $22,162.59

Total Cash Flows = Operating Cash Flow + Terminal Cash Flows
Total Cash Flows = $34,514.00 + $22,162.59
Total Cash Flows = $56,676.59