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Homework answers / question archive / A project has an annual operating cash flow of $45000
A project has an annual operating cash flow of $45000. Initially, this four-year project required $3800 in net working capital, which is recoverable when the project ends. The firm also spent $21500 on equipment to start the project. This equipment will have a book value of $4300 at the end of Year 4. What is the cash flow for Year 4 of the project if the equipment can be sold for $5400 and the tax rate is 30%? O $53 862 900 $400 370 $52 038 $53 900 $40 370
Answer : Correct Option is 40370
Reason :
Operating Cash Flow = [Annual Cash Flow * (1 - Tax rate)] + Recovery of Net Working Capital + After Tax Salvage Value
After tax Salvage Value = Sales value - Tax on Gain on Sales
= 5400 - [(5400 - 4300) * 0.30]
= 5070
Operating Cash Flow = [Annual Cash Flow * (1 - Tax rate)] + Recovery of Net Working Capital + After Tax Salvage Value
= [45000 * (1 - 0.30)] + 3800 + 5070
= 40370
