#21) For project A, the cash flow effect from the change in net working capital
ID: 2784555 • Letter: #
Question
#21) For project A, the cash flow effect from the change in net working capital is expected to be 100 dollars at time 2, the level of net working capital is expected to be 800 dollars at time 0, and the level of net working capital is expected to be 1,100 dollars at time 2. What is the cash flow effect from the change in net working capital expected to be at time 1?
#22) What is the expected after-tax cash flow from selling a piece of equipment if Litchfield Design purchases the equipment today for 120,000 dollars, the tax rate is 20 percent, the equipment is sold in 3 years for 10,000 dollars, and MACRS depreciation is used where the depreciation rates in years 1, 2, 3, 4, and 5 are 33 percent, 27 percent, 25 percent, 10 percent, and 5 percent, respectively?
Explanation / Answer
21.
Change in working capital in year 1 is $0, so it will not affect net cash flow for year 1, from the change in net working capital expected to be at time 1.
No effect .
22.
Purchase price = $120,000
Book Value of equipment at end of year 3 = 5% of purchase price
Book Value of equipment at end of year 3 = 5% × $120,000
= $6,000.
Book Value of equipment at end of year 3 is $6,000.
Sale price = $10,000.
After tax cash flow = $6,000 + ($10,000 - $6,000) × (1 - 20%)
= $6,000 + $3,200
= $9,200
After tax cash flow from sale of equipment at end of year 3 will be $9,200.
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