In the fourth and final year of a project, SVC expects operating cash flow of $440,000. The project required an $80,000 investment in working capital at the beginning. Of that amount, $60,000 will be recovered in year 4. Machinery associated with the project will be sold for exactly its undepreciated value of $15,000. Total free cash flow for the fourth year is
A) $75,000.
B) $1,500,000.
C) $515,000.
D) $535,000.

Question

Quizplus · Accepted Answer

Operating cash flow in year 4 = $440,000
Working capital investment at the beginning = $80,000
Working capital recovered in year 4 = $60,000
Net working capital investment = $80,000 - $60,000 = $20,000

Free cash flow = Operating Cash Flow - Net Working Capital Investment - Proceeds from Sale of Equipment
Free cash flow = $440,000 - $20,000 - $15,000 = $405,000

Total free cash flow for the fourth year = $405,000 + $60,000 (working capital recovered in year 4) = $515,000.

Therefore, the correct choice is C.

In the Fourth and Final Year of a Project, SVC