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Homework answers / question archive / The company is evaluating a new project
The company is evaluating a new project. The project will require €325,000 in new fixed assets, €160,000 in additional inventory and €35,000 in additional trade credits. The service life of the project is 5 years, with an estimated increase of 100,000 euros in trade payables and 300,000 euros in non-trade payables. The fixed assets will be amortized by the Italian amortization method over the life of the project with a final book value of zero. At the end of the project, the fixed assets will be sold at 25% of the original cost. Commercial working capital will recover its initial value at the end of the life of the project. The project is expected to have an annual revenue of €554,000, a fee of €430,000, a tax rate of 35% and a required return of 15%. What is the after-tax cash flow from the sale of fixed assets at the end of the project? (To answer your question about the value of the euro as a whole).
Computation of the after-tax cash flow from the sale of fixed assets at the end of the project:-
Gross sale proceeds = €325,000 * 25 %
= €81,250
Book value of the fixed asset after 5 years = 0
Gain on sale of fixed asset = Gross sale proceeds - Book value
= €81,250 - €0
= €81,250
After-tax cash flow from sale of fixed assets = Gain on sale of fixed assets * (1 - Tax rate)
= €81,250 * (1 - 35%)
= €52,812.50 Or €52,813
