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25 September, 00:22

A 4-year project has an annual operating cash flow of $53,500. At the beginning of the project, $4,450 in net working capital was required, which will be recovered at the end of the project. The firm also spent $22,800 on equipment to start the project. This equipment will have a book value of $4,820 at the end of the project, but can be sold for $5,790. The tax rate is 35 percent. What is the Year 4 cash flow?

A. $61,714

B. $54,501

C. $20,633

D. $64,080

E. $63,401

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  1. 25 September, 02:39
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    E. $63,401

    Explanation:

    gain on disposal = salvage value of plant - book value on date of sale

    = $5,790 - $4,820

    = $970

    tax on disposal = $970*35%

    = $339.50

    after tax salvage value = $5,790 - $339.50

    = $5,450.50

    total cash flow in 4 years

    = annual operating cash flow + net working capital + after tax salvage value

    = $53,500 + $4,450 + $5,450.50

    = $63,401

    Therefore, The Year 4 cash flow is $63,401.
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