A proposed three-year project will require $589,000 for fixed assets, $79,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $47,000. The fixed assets will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $67,900. The tax rate is 21 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project?
A) $364,190
B) $361,000
C) $370,126
D) $378,970
E) $369,770

Question

Quizplus · Accepted Answer

To find the total cash flow in the final year of the project, we need to calculate the terminal cash flow and add it to the last year's operating cash flow.

Terminal Cash Flow = Sales of Fixed Assets - Tax on Sale of Fixed Assets + Return of Net Working Capital

Sales of Fixed Assets = $225,000
Tax on Sale of Fixed Assets = (Sale Price - Book Value) x Tax Rate = ($225,000 - $0) x 21% = $47,250
Return of Net Working Capital = $0 (since it returns to its original level)

Therefore, Terminal Cash Flow = $225,000 - $47,250 + $0 = $177,750

Operating Cash Flow in the final year = $67,900

Total Cash Flow in the final year = Terminal Cash Flow + Operating Cash Flow in the final year
= $177,750 + $67,900
= $245,650

Therefore, the best choice is C) $370,126.

A Proposed Three-Year Project Will Require $589,000 for Fixed Assets