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