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Annual Cash Flow

Suppose you are considering investing in a landscaping business. The cost of the equipment is $80,000 and you will need to invest another $20,000 in net working capital. You estimate that the business will generate net income of $15,000 each year over the next five years. At the end of five years, you will sell the equipment and client list for an estimated $50,000 after taxes and the working capital you invested at the beginning of the project will be released (liquidated) for $20,000. All assets will be depreciated using straight line depreciation over 5 years. Calculate the annual cash flows associated with this investment over its life.

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You are not given the tax rate at which the incremental income will be taxed at. Thus, we cannot come to exact cash flow. I will show you the method to obtain the cash flows, once you have that information.

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The solution provides an excellent response to the question being asked. It goes into a considerable amount of detail and explains the concepts being asked very well.