I need some help with the calculation of cash flows. I am confused with depreciation tax shield calculation and also the net of tax on gain calculation. I have an unclear understanding of the entire formula. I have added a question with the answer. Would be great if you could help!
Carl Corporation is considering a $1,000,000 investment that will have a three-year life. Working capital of $250,000 will be required at the beginning of the project. At the end of the project, the equipment will be sold for an estimated $400,000. Carl Corporation's required rate of return is 10%. The company expects annual cash flow of $400,000. Carl Corporation's tax rate is 40%. The equipment will be depreciated over a three-year period for tax purposes, and the depreciation rates for tax purposes (MACRS) are as follows:
Year Depreciation rate
Present value factors are as follows:
PV of an Annuity
What is the cash flow in the final year?
The final year's cash flow consists of:
Operating cash flow $240,000
Depreciation Tax Shield 59,240
Proceeds from sale,
net of tax on gain:
Released working capital 250,000
Total cash flow 818,880
Could you explain the answer? Thank you!
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