Gallatin, Inc., is considering an investment of $367000 in an asset with an econ

Question

Gallatin, Inc., is considering an investment of $367000 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 $247000 and $72,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 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 $47,000 in nominal terms at that time. The one-time net working capital investment of $11,000 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34 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 doller, e.g.. 32.) Cash flow Year e Year? Year 2 Year 3 Year 4 Year 5

Explanation / Answer

Cash flows given in above table.

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Year 0 1 2 3 4 5 Investment -367000 Working Capital Investment -11000 Annual Cash Revenues 247000 254410 262042.30 269903.57 278000.68 From Year 2-5 Annual cash revenue *1.03 Annual cash Expenses 72000 74160 76384.80 78676.34 81036.63 From Year 2-5 Annual cash expenses *1.03 Depreciation = Investment/5 73400 73400 73400 73400 73400 EBIT =Revneues -Expenses -Depreciation 101600 106850 112257.5 117827.23 123564.04 Tax = Ebit* Tax rate 34544 36329 38167.55 40061.257 42011.774 EAT =EBIT -Tax 67056 70521 74089.95 77765.969 81552.268 Depreciation 73400 73400 73400 73400 73400 After tax Salvage Value 31020 Working capital Recovery 11000 Cash flow from Assets = EAT +Depreciation +After Tax Salvage Value+Working capital -378000 140456 143921 147490 151166 196972

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