Logico Ltd. is considering investing in a project that has a 6-year life. Data r

Question

Logico Ltd. is considering investing in a project that has a 6-year life. Data relating to this project is as follows:

Initial investment

$643873

Residual value (at the end of 6 years)

$181382

The project is expected to provide the following:

Year 1

Years 2-6

Sales

$655000

$441418

Variable expenses

294750

198638

Fixed costs

160000

143705

All of the above amounts represent cash flows, with the exception of depreciation. Logico depreciates its assets using the straight-line method.

What are the expected annual cash flows in years 2-6 relating to this investment?

Select one:

a. $176157

b. $21993

c. $206387

d. $242780

Initial investment

$643873

Residual value (at the end of 6 years)

$181382

Explanation / Answer

Expected annual cash flows in years 2-6 = $2,06,387

Expected annual cash flows in years 2-6 = Net Income from operation + Depreciation of asset

Net Income from operation = Sales – Variable costs – Fixed costs

= $441418 – 198638 – 143705

= $ 99,075

Depreciation = Asset Value/ Usefull life

= $643873 / 6

= $1,07,312

Therefore, Expected annual cash flows in years 2-6 = $ 99,075 + $1,07,312

= $2,06,387

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