Calamit4' Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a historical cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-tine basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflower's expected total cash inflow in the final year of the project is?
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B
The expected total cash inflow in the final year of the project consists of(1) $60,000 of cash flows from ongoing operations [$100,000 gross cash inflow x (1.0--- .40 tax rate)], (2) a $6,000 depreciation t shield [($15,000 annual depreciation expense on new equipment) x .40], (3) the after-tax cash inflow from disposal of the new equipment, in this case $6,000 [$10,000 disposal value x (1.0--- .40 tax rate)], and (4) recovery of the working capital set aside for the project ($24 000). The expected total cash inflow in the final year of the project is thus $96,000 ($6O.O00 + $6,000 + $6,000 + $24,000).
