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IMANET CMA Exam - Topic 6 Question 23 Discussion
Topic #: 6
Garfield, Inc. is considering a 10-year capital investment project with forecasted revenues of $40,000 per year and forecasted cash operating expenses of $29,000 per year. The initial cost of the equipment for the project is $23,000. and Garfield expects to sell the equipment for $9,000 at the end of the tenth year The equipment will be depreciated over 7 years The project requires a working capital investment of $7,000 at its inception and another $5,000 at the end of Year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the project in the tenth year is?
The project will have an $11,000 before-tax cash inflow from operations in the tenth year ($40,000 --- $29,000). Also, $9,000 will be generated from the sale of the equipment. The entire $9,000 will be taxable because the basis of the asset was reduced to zero in the 7th year. Thus, taxable income will be $20,000 ($11,000 + $9,000), leaving a net after-tax cash inflow of $12,000 [$20.000 x (1.0--- .4)] To this $12,000 must be added the $12,000 tied up in working capital ($7,000 + $5,000). The total net cash flow in the 10th year will therefore be $24.O0j
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