Problem:
A project requires buying a $30,000 equipment, which will be depreciated straight-line to zero over its 5-year life. The project also requires an immediate increase in net working capital of $4,000, which will be fully recovered at the end of year 5. The company has an average tax rate of 40%. The project will generate an annual operating cash flow (OCF) of $15,000 in each of the next three years. At the end of year 3, the equipment will be sold for $5,000 in the market.
Required:
Question: What is the initial cash flow (project cash flow in year 0) for this project?
- -$26,000
- -$30,000
- -$34,000
- -$45,000
Note: Solve the problem and show all work.