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Consider the following information regarding Ariadne Fiberworks and the planned acquisition of a new weaving loom
- Consider the following information regarding Ariadne Fiberworks and the planned acquisition of a new weaving loom. The loom will cost 145,000 and will be fully depreciated over 10 years using straight-line depreciation. Operating cash flows in year 1 are anticipated to be 27,500 and will grow at 3% per year thereafter, and the initial investment in net working capital of 15,000 will be maintained throughout the life of the project. Assuming a 10-year life, the anticipated incremental cash flows in year 10 at the end of the project are:
Expert Solution
Operating cash flow in year 1 = $27,500
For the next 9 years, it will grow at a rate of 3%.
Therefore,
Anticipated operating cash flow in year 10 = $27,500 * (1+3%)^9 = $35,881.26.
| Category | $ |
| Operating cash flow | 35,881.26 |
| Release of net working capital | 15,000.00 |
| Incremental cash flow | 50,881.26 |
Note: Operating cash flows include depreciation. so no need to add that again.
Excel formulas:
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