Marie's Fashions is considering a project that will require $41,000 in net working capital and $64,000 in fixed assets. The project is expected to produce annual sales of $62,000 with associated cash costs of $41,000. The project has a 3-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 34 percent. What is the project cash flow in year 3?

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Dryomys Dryomys · Answer 1 · 2019-10-07T17:59:34+02:00

Answer:

$21,113

Explanation:

Given that,

working capital = $41,000

Present value of outflow = $64,000

Life = 3 years

Sales = $62,000

costs = $41,000

Tax rate = 34 percent

Net cash outflow = working capital + Present value of outflow

= $41,000 + $64,000

= $105,000

[tex]Depreciation=\frac{Present\ value\ of\ outflow}{Life}[/tex]

[tex]Depreciation=\frac{64,000}{3}[/tex]

= $21,333

Increase in revenue = Sales - costs - Depreciation

= $62,000 - $41,000 - $21,333

= -($333)

Revenue after tax = Increase in revenue - Tax@34%

= -($333) - 0.34 × (-$333)

= -($333) + 113.33

= -($220)

Cash flow after tax = Revenue after tax + Depreciation

= -($220) + $21,333

= $21,113