XYZ Corporation is considering a new three-year expansion project that has an initial fixed asset cost of $3 million

Finance Nov 24, 2020

XYZ Corporation is considering a new three-year expansion project that has an initial fixed asset cost of $3 million. The project also requires an initial investment in net working capital of $200,000. The fixed asset will be depreciated straight-line to zero salvage value over its three-year tax life, after which time it will be worth $175,000 (MV3 New = $175,000). The project is estimated to generate $1,650,000 in annual sales, with costs of $650,000. XYZ's corporate tax rate is 40 percent. What is ANOCF3? (Note: Incremental non-operating cash flows occur only at the end of year three.) $105,000 $305,000 $200,000 $175,000

Expert Solution

reversal of working capital200000+Proceeds from sale of equipment after tax=selling price* ( 1 -tax rate)105000+Tax shield on salvage book value=Salvage value * tax rate0=Terminal year after tax cash flows305000

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