**Question**

Kell Inc. is analyzing an investment for a new product expected to have annual sales of 100,000 units for the next 5 years and then be discontinued. New equipment will be purchased for $1,200,000 and cost $300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the equipment, which can be sold for $300,000. Additional working capital of $400,000 will be required immediately and needed for the life of the product. The product will sell for $80, with direct labor and material costs of $65 per unit. Annual indirect costs will increase by $500,000. Kell's effective tax rate is 40%.

In a capital budgeting analysis,what is the expected cash flow at time=5(fifth year of operations) that Kell should use to compute the net present value?

**Answer**:$1,120,000

**(I worked it out as below, please will somebody have a look and confirm if this is correct; as I am not sure if my working is correct.)**

**My Working**

Gain from Sale of Equipment: $300,000

Equipment Removal Exp : $100,000

Balance : $ 200,000

Tax on Above (40%) : $80,000

Net Gain /Cash Flow : $120,000.......................................................(A)

Cash Flow 5th Yr

Sale = $80 x 100,000 units = $8,000,000

V.Cost=$65 x 100,000 units= ($6,500,000)

Release of W.Capital = $400,000

Indirect Exp= ($500,000)

Subtotal $1,400,000

Tax 40% $560,000

Less

D.Tax Asset $160,000 $400,000

Total Cash Flow $1,000,000.........................................(B)

**(A) + (B) =$120,000 + $ 1,000,000=$1,120,000**

**Deferred Tax Asset Calculation**

Financial Reporting Tax Purpose

Depreciation $300,000 $500,000

Tax Savings 40% $120,000 $200,0000

Therefore Excess take as tax in Financial Reporting =80,000 per year for 3 yrs

If $80,000 was adjusted in the 4th year, Balance remaining to be adjusted =$160,000