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Future Cash Flows: Initial investment, operating flows, end

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A firm believes it can generate an additional $250,000 per year in revenues for the next 5 years if it replaces existing equipment with new equipment that costs $210,000. The firm expects to be able to sell the new equipment when it is finished using it (after 5 years). The existing equipment has a book value of $20,000 and a market value of $12,000. Variable costs are expected to total 40% of revenue. The additional sales will require an initial investment in net working capital of $15,000, which is expected to be recovered at the end of the project (after 5 years). Assume the firm uses straight line depreciation. The firm's marginal tax rate is 30%.

a) What is the required initial investment (at t = 0)?

b) What is the annual operating cash flow?

c) What is the end of project cash flow?

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Solution Summary

Your tutorial is in excel, attached. It shows the three items needed for the initial outlay, the process for computing the annual after tax cash flows, and the terminal cash flows at the end. You are missing one fact (salvage of new equipment).

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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