Question

Consider the following information regarding Ariadne Fiberworks and the planned acquisition of a new weaving loom. The loom will cost 269,000 and will be fully depreciated over 12 years using straight-line depreciation. Operating cash flows in year 1 are anticipated to be 30,910 and will grow at 3.6% per year thereafter, and the initial investment in net working capital of 17,350 will be maintained throughout the life of the project. Assuming a 12-year life, the anticipated incremental cash flows in year 12 at the end of the project are:

Answer 1

Based on the operating cash flows to Ariadne Fiberworks, the net working capital, and the life of the project, the anticipated incremental cash flows in year 12 would be $62,959.61

What is the anticipated incremental cash flows?

The anticipated cash flow in year 12 would be:

= Operating cash flow in year 1 x (1 + 3.6%)¹¹

= 30,910 x (1 + 3.6%)¹¹

= $45,609.61

The incremental cash flow would be:

= Anticipated cash flow + working capital

= 45,609.61 + 17,350

= $62,959.61

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