Wings and More is considering a 3-year project. The straight line depreciation m

Question

Wings and More is considering a 3-year project. The straight line depreciation method is applied to all the fixed assets necessary for this project. What is the net salvage cash flow from the sale of the fixed assets when this project is over?

Initial investment Annual sales Annual operating costs Initial increase in NWC Resale value Tax rate Discount Rate S 300,000 S 1,200,000 S 500,000 S300,000 S 200,000 30% 10% Year 0 Year 1 Year 2 Year 3 Initial investment Revenue Operating costs Depreciation EBT Tax Net Income 300,000 1.200,0001,200,0001,200,000 500,000 500,000 500,000 600,000 180,000 420,000 600,000 180,000 420,000 600,000 180,000 420,000 Operating cash flow Net capital Spending 520,000 520,000 (300,000) 300,000 (600,000) 300,000 Incremental cash flow 520,000 520,000

Explanation / Answer

Depreciation = Initial investment / No. of years = 300,000 / 3 = 100,000

After 3 years, the book value of asset is zero.

Net Salvage Cash Flow = Resale Value x (1 - tax rate) = 200,000 x (1 - 30%) = 140,000

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