Lo, Inc., is considering an investment of $435,000 in an asset with an economic life of five

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Lo, Inc., is considering an investment of $435,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $275,000 and $87,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 percent. The company will use the straightline method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $55,000 in nominal terms at that time. The one-time net working capital investment of $15,000 is required immediately and will be recovered at the end of the project. The corporate tax rate is 21 percent. What is the project’s total nominal cash flow from assets for each year?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Cash Flow From Assets
Cash flow from assets is the aggregate total of all cash flows related to the assets of a business. This information is used to determine the net amount of cash being spun off by or used in the operations of a business. The concept is comprised of...
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Corporate Finance

ISBN: 978-1259918940

12th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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