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# Terminal cash flows at end of the project

Johnson Corp. is considering a huge project to expand.The project has an initial cost of \$500,000 (this is amount can be depreciated using the following depreciation schedule: Year 1 is 33%, Year 2 is 45%, Year 3 is 15%, Year 4 is 7%. If the project moves forward, at t = 0 the company will need to increase its inventories by \$50,000, and its accounts payable will rise by \$10,000. This net operating working capital will be recovered at the end of the projects life (t = 4). If the project is moves forward, the company will realize an additional \$600,000 in sales over each of the next four years (t = 1, 2, 3, 4). The companys operating cost (not including depreciation) will equal \$400,000 a year. The companys tax rate is 40 percent. At t = 4, the projects economic life is complete, but it will have a salvage value of \$50,000. The projects WACC = 10 percent. What is the one time cash flows/terminal cash flow associiated with ending the project?

a) 60,000
b) 40,000
c) 50,000
d) 90,000
e) 70,000

#### Solution Preview

Johnson Corp. is considering a huge project to expand.The project has an initial cost of \$500,000 (this is amount can be depreciated using the following depreciation schedule: Year 1 is 33%, Year 2 is 45%, Year 3 is 15%, Year 4 is 7%. If the project moves forward, at t = 0 the company will need to increase its inventories by \$50,000, and its accounts payable will rise by \$10,000. This net operating working capital will be ...

#### Solution Summary

Solution analyze terminal cash flows at end of the project

\$2.19