Fun Land is considering adding a miniature golf course to its facility. The cour

Question

Fun Land is considering adding a miniature golf course to its facility. The course would cost $52,000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $33,000 a year with $9,000 of that amount being variable cost. The fixed cost would be $7,200. In addition, the firm anticipates an additional $10,000 in revenue from its existing facilities if the course is added. The project will require $6,000 of net working capital, which is recoverable at the end of the project. What is the after-tax cash flow for the final year if the tax rate is 29 percent?
a. $28,329
b. $28,481
c. $28,798
d. $28,837
e. $28,920

Explanation / Answer

Hi,

Please find the answer as follows:

Annual Cash Inflows = (Golfing Fees + Additional Revenues - Variable Cost - Fixed Cost - Depreciation)*(1-Tax Rate) + Depreciation = (33000 +1000 - 9000 - 7200 - 52000/4)*(1-.29) + 52000/4 = 22798

Final Year Cash Flow = Annual Cash Inflows + Recovery of Working Capital = 22798 + 6000 = 28798

Option C (28798) is the correct answer.

Thanks.

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