Gallatin Inc is considering an investment of 367000 in an as

Gallatin, Inc., is considering an investment of $367000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $247000 and $72,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 percent. The company will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $47,000 in nominal terms at that time. The one-time net working capital investment of $11,000 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34 percent tax rate. What is the project\'s total nominal cash flow from assets for each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole doller, e.g.. 32.) Cash flow Year e Year? Year 2 Year 3 Year 4 Year 5

Solution

Cash flows given in above table.

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Year	0	1	2	3	4	5
Investment	-367000
Working Capital Investment	-11000
Annual Cash Revenues		247000	254410	262042.30	269903.57	278000.68	From Year 2-5 Annual cash revenue *1.03
Annual cash Expenses		72000	74160	76384.80	78676.34	81036.63	From Year 2-5 Annual cash expenses *1.03
Depreciation = Investment/5		73400	73400	73400	73400	73400
EBIT =Revneues -Expenses -Depreciation		101600	106850	112257.5	117827.23	123564.04
Tax = Ebit* Tax rate		34544	36329	38167.55	40061.257	42011.774
EAT =EBIT -Tax		67056	70521	74089.95	77765.969	81552.268
Depreciation		73400	73400	73400	73400	73400
After tax Salvage Value						31020
Working capital Recovery						11000
Cash flow from Assets = EAT +Depreciation +After Tax Salvage Value+Working capital	-378000	140456	143921	147490	151166	196972