Question

ou are a part of a finance team in a firm, and you were asked by your boss to estimate the annual cash flows of a project. You estimated that the annual sales and costs of this project is $150,000 and $25,000 respectively. In order to start the project, the firm needs to invest in $300,000 in new equipment including shipping and installation, and $30,000 in working capital. The life of this asset is 3 years, and the project will be terminated after 3 years of operations. The equipmetn will depreciate via simplified straight-line method, and the estimated market value of the machine in 3 years is $20,000. The firm has a marginal tax rate of 22%. What is the total annual cash flow of the first year of this project? Round to the nearest penny. Do not include a dollar sign in your answer.

Answer 1

Answer:

$119,500

Explanation:

The computation of the total annual cash flow of the first year is shown below:

= (Annual sales - costs - depreciation) × ( 1 - tax rate) + depreciation expenses

= ($150,000 - $25,000 - $100,000) × (1 - 22%) + $100,000

= $25,000 × 0.78 + $100,000

= $19,500 + $100,000

= $119,500

The depreciation expense is computed below:

= $300,000 ÷ 3 years

= $100,000

The (Annual sales - costs - depreciation) is called EBIT