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13 July, 01:02

A 4-year project has an annual operating cash flow of $50,500. At the beginning of the project, $4,150 in net working capital was required, which will be recovered at the end of the project. The firm also spent $22,200 on equipment to start the project. This equipment will have a book value of $4,580 at the end of the project, but can be sold for $5,610. The tax rate is 35 percent. What is the Year 4 cash flow? a. $19,512

b. $59,900

c. $58,297

d. $60,621

e. $51,600

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  1. 13 July, 01:12
    0
    Option (b) is correct.

    Explanation:

    Given that,

    Annual operating cash flow = $50,500

    Net working capital = $4,150

    Equipment will have a book value = $4,580

    Salvage value = $5,610

    Gain on disposal:

    = Salvage value of plant - Book value on the date of sale

    = $5,610 - $4,580

    = $1,030

    Tax on disposal:

    = Gain on disposal * Tax rate

    = $1,030 * 35%

    = $360.50

    After tax salvage value:

    = Salvage value of plant - Tax on disposal

    = $5,610 - $360.50

    = $5,250 (Approx)

    Year 4 cash flow:

    = Annual operating cash flow + Net working capital + After tax salvage value

    = $50,500 + $4,150 + $5,250

    = $59,900
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