Etonic Inc. is considering an investment of $373,000 in an asset with an economi

Question

Etonic 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. Etonic 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 total nominal cash flow from assets for each year?

Explanation / Answer

0 1 2 3 4 5 Initial Outlay $(373,000) $            -   $            -   $            -   $            -   $             -   Nominal Cash Revenue $             -   $ 253,000 $ 263,120 $ 273,645 $ 284,591 $ 295,974 Nominal Cash Expense $             -   $ (78,000) $ (81,120) $ (84,365) $ (87,739) $   (91,249) Residual Value $             -   $            -   $            -   $            -   $            -   $    53,000 Woking Capital $   (14,000) $            -   $            -   $            -   $            -   $    14,000 Tax (35%) $             -   $ (88,550) $ (92,092) $ (95,776) $ (99,607) $(103,591) Tax Relief $   26,110 $   26,110 $   26,110 $   26,110 $    26,110 Net Cash Flow $(387,000) $ 112,560 $ 116,018 $ 119,614 $ 123,354 $ 194,244

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