A project requires buying a $30,000 equipment, which will be depreciated straigh

Question

A project requires buying a $30,000 equipment, which will be depreciated straight-line to zero over its 5-year life. The project also requires an immediate increase in net working capital of $4,000, which will be fully recovered at the end of year 5. The company has an average tax rate of 40%. The project will generate an annual operating cash flow (OCF) of $15,000 in each of the next five years. At the end of year 5, the equipment will be sold for $5,000 in the market. What is the initial cash flow (project cash flow in year 0) for this project?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Cash Flow = -Initial Cost of Investment - Working Capital = -30000 - 4000 = -34000

Answer is -34000

Thanks.

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