A firm is considering the purchase of a fixed asset for $500 that will be depreciated as a seven-year asset under MACRS. This project will last five years and the asset will be worth $75 at the end of the project. The asset will cause the firm to reduce its net working capital by $60 at the beginning of the project but net working capital will revert back to normal at the end of the project. The firm expects annual sales to be $750 and annual cost of goods sold to be $360. The tax rate is 20%. Find the cash flow from assets for year five. a.)$463 b.)$492 c.)$373 d.)$299 e.)$179 f.)$343
A firm is considering the purchase of a fixed asset for $500 that will be depreciated as a seven-year asset under MACRS. This project will last five years and the asset will be worth $75 at the end of the project. The asset will cause the firm to reduce its net working capital by $60 at the beginning of the project but net working capital will revert back to normal at the end of the project. The firm expects annual sales to be $750 and annual cost of goods sold to be $360. The tax rate is 20%. Find the cash flow from assets for year five. a.)$463 b.)$492 c.)$373 d.)$299 e.)$179 f.)$343
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A firm is considering the purchase of a fixed asset for $500 that will be depreciated as a seven-year asset under MACRS. This project will last five years and the asset will be worth $75 at the end of the project. The asset will cause the firm to reduce its net working capital by $60 at the beginning of the project but net working capital will revert back to normal at the end of the project. The firm expects annual sales to be $750 and annual cost of goods sold to be $360. The tax rate is 20%. Find the cash flow from assets for year five.
a.)$463
b.)$492
c.)$373
d.)$299
e.)$179
f.)$343
Expert Solution
Introduction:
Cash flow from the assets in year five is the sum of operating cash flow and after-tax salvage value of the asset less reversal of net working capital.
Step 1: Calculation of book value of the asset at the end of year 5:
Step 2: Calculation of after-tax salvage value of the asset:
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