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(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. 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
Expert Solution
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
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