3. A project will generate before tax cost savings of $83,000 per year for 5 yea
ID: 2745757 • Letter: 3
Question
3. A project will generate before tax cost savings of $83,000 per year for 5 years, create additional depreciation expense of $73,000 per year and result in the following net working capital needs:
Time
0
1
2
3
4
5
Acct rec
100,000
150,000
150,000
150,000
150,000
0
Inventory
200,000
300,000
300,000
300,000
300,000
0
Acct payable
120,000
180,000
180,000
180,000
180,000
0
The company’s marginal tax rate is 30%. What is the project’s cash flow in year 5 (t=5)?
Time
0
1
2
3
4
5
Acct rec
100,000
150,000
150,000
150,000
150,000
0
Inventory
200,000
300,000
300,000
300,000
300,000
0
Acct payable
120,000
180,000
180,000
180,000
180,000
0
Explanation / Answer
1) Calculation of Project's cash flow in year 5 :
Before tax cashflow in year 5 = $83000
Less: Tax Burden on savings =(24900)
After tax cash savings/cash flow = $58100
Add : Receipt from account receivables=$150000
Less: Payment to Account payables =($180000)
Projects's cashflow in year 5 = $28100
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