Gallatin, Inc., is considering an investment of $373,000 in an asset with an eco

Question

Gallatin, Inc., is considering an investment of $373,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $253,000 and $78,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 4 percent. The company will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $53,000 in nominal terms at that time. The one-time net working capital investment of $14,000 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 35 percent tax rate.
  
What is the project’s total nominal cash flow from assets for each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole dollar, e.g., 32.)
  

Cash flow Year 0 $ Year 0 $ Year 2 $ Year 3 $ Year 4 $ Year 5 $

Explanation / Answer

Project's total nominal cash flow from assets are: Year Cash outflow Rev Exp dep NOI tax @0.35 NI Nominal Cash flow 0 -373000 -373000 0 -14000 -14000 1 253000 78000 74600 100400 35140 65260 139860 2 263120 81120 74600 107400 37590 69810 144410 3 273645 84365 74600 114680 40138 74542 149142 4 284591 87739 74600 122251 42788 79463 154063 5 295974 91249 74600 130125 45544 84581 159181 5 14000 5 53000 18550 34450

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