Kelly Corporation is considering an investment proposal that requires an initial
ID: 2348627 • Letter: K
Question
Kelly Corporation is considering an investment proposal that requires an initial investment of $150,000 in equipment. Fully depreciated exisitng equipment may be disposed of for $40,000 pre-tax. The proposed project will have a five year life, and is expected to produce additional revenue of $65,000 per year. Expenses other than depreciation will be $15,000 per year. The new equipment will be deprciated to zero over the five-year useful life, but is expected to actually be sold for $20,000. Kelly has a 35% tax rate.a) What is the net initial outlay for the proposed project?
b) What is the operating cash flow for years 1-4
c) What is the total cash flow at the end of year 5(operating cash flow for year 5 plus terminal cash flow)?
Explanation / Answer
a) initial outlay = -150,000 + (40,000*0.65) = -124,000 b) operating cf for year 1-4 = (65000 - 15000)*0.65 + (30000*0.35) = 43,000 c) total cf at year 5 = (65000 - 15000)*0.65 + (30000*0.35) + (20,000*0.65) = 56,000
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