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Homework answers / question archive / (CB CFs) A capital budgeting project will cause EBIT to increase by $58076 per year

(CB CFs) A capital budgeting project will cause EBIT to increase by $58076 per year

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(CB CFs) A capital budgeting project will cause EBIT to increase by $58076 per year. The annual depreciation expense is $43459. The firm's tax rate is 24%. At the end, the equipment will be sold for its salvage value of $49948; its book value will be $34515 at that time. The initial increase in net working capital of $18238 will be recaptured at the end of the project's life. What is the cash flow in the last year of the project's life, in

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Computation of Cash Flow in the Last Year of the Project's Life:

Annual Cash Flow = EBIT*(1 - Tax Rate) + Depreciation

= $58,076*(1 - 0.24) + $43,459

= $87,596.76

 

Terminal Cash Flow = Salvage Value + Recovery of Net Working Capital - Tax*(Salvage value - Book value)

= $49,948 + $18,238 - 0.24 * ($49,948 - $34,515)

= $71,889.92

 

Cash Flow in the Last Year = Annual cash flow + Terminal cash flow

= $87,596.76 + $71,889.92

Cash Flow in the Last Year = $159,486.68