"Explorer, Inc. is considering a new 4-year project that requires an initial fixed asset (equipment) investment of $200,000. The fixed asset is three-year MACRS property for tax purposes. In four years, the equipment will be worth about half of what we paid for it. The project is estimated to generate $500,000 in annual sales, with costs of $400,000. The firm has to invest $100,000 in net working capital at the start. After that, net working capital requirements will be 25 percent of sales. The tax rate is 21 percent. What is the incremental cash flow in year 4

The Incremental cash flow in year 4 is $161,112

Explanation:

According to the given data, the Statement showing accumulated depreciation and book value of asset  is as follows:

Year Current year depreciationAccumulated depreciationBook value

0                                                                                   $200,000

1$200,000*33.33%                          $66,660                    133,340

2$200,000*44.45%                            $88,900                   44,440

3$200,000*14.81%                           $29,620                   14,820

4$200,000*7.41%                            $14,820                     0

After tax salvage value of equipment at the end of 4th year  =(Sale value-Book value)*(1-tax rate)

=[($200,000*50%)-$0]*(1-0.21)

=$79,00 0

Statemet showing Incremental cash flow in year 4

Amout($)

Sales       500,000

Less:Cost400,000

Less:Depreciation14,820

Earning before tax85,180

Less:Tax21%17,887

Earning after tax67,292

Add:Depreciation14,820

Add:after tax salvage value of equipment79,000

Net cash flow$161,112

The Incremental cash flow in year 4 is $161,112

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