B-182 SOLUTIONS
11. The cash outflow at the beginning of the project will increase because of the spending on NWC. At the
end of the project, the company will recover the NWC, so it will be a cash inflow. The sale of the
equipment will result in a cash inflow, but we also must account for the taxes which will be paid on this
sale. So, the cash flows for each year of the project will be:
Year Cash Flow
0 –$4,200,000 = –$3,900,000 – 300,000
1 1,631,500
12. First we will calculate the annual depreciation for the equipment necessary for the project. The
depreciation amount each year will be:
Year 1 depreciation = $3,900,000(0.3333) = $1,299,870
Year 2 depreciation = $3,900,000(0.4445) = $1,733,550
Year 3 depreciation = $3,900,000(0.1481) = $577,590
So, the book value of the equipment at the end of three years, which will be the initial investment minus
the accumulated depreciation, is:
Book value in 3 years = $3,900,000 – ($1,299,870 + 1,733,550 + 577,590)
Book value in 3 years = $288,990
The asset is sold at a loss to book value, so this loss is taxable deductible.
Aftertax salvage value = $210,000 + ($288,990 – 210,000)(0.35)
Aftertax salvage value = $237,647