ABC, Inc is planning the purchase of a new equipment which will cost $36,469. Th

Question

ABC, Inc is planning the purchase of a new equipment which will cost $36,469. The project is expected to last for 5 years. The equipment will have a book value of $2,134 at the end of Year 5. The increase in net working capital is expected to be $2,417, all of which will be recouped at the end of the project. The project is expected to have annual operating cash flows of $19,396. What is the Total Cash Flow in Year 5 of the project if the equipment can be sold for $5,560 and the tax rate is 32%?

Note: In the last year of the project, the Total Cash Flow = Operating Cash Flow + Terminal Cash Flow

Explanation / Answer

Terminal cash flow = after tax sale value of equipment + recvoery of working capital

After tax sale value of equipment

Terminal cash flow = 4464+2417

= $6,881

Total cash flow in year 5 = 19396+6881

= $26,277

Ending book value $2,134 Sale value $5,560 Profit on sale $3,426 Tax on profits $1,096 After tax sale value $4,464

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