Kelly Corporation is considering an investment proposal that requires an initial investment of $150,000 in

equipment. Fully depreciated existing equipment may be disposed of for $40,000 pre-tax.

The proposed project
will have a five-year life, and is expected to produce additional revenue of $65,000 per year. Expenses other
than depreciation will be $15,000 per year. The new equipment will be depreciated to zero over the five-year
useful life, but it is expected to actually be sold for $20,000. Kelly has a 35% tax rate.
a. What is the net initial outlay for the proposed project?
b. What is the operating cash flow for years 1-4?
c. What is the total cash flow at the end of year five (operating cash flow for year 5 plus terminal cash flow)?

a. Net initial outlay = $150,000 - ($40,000"(1 -.35)) = $124,000
b. Annual operating cash flows:
First, depreciation expense will be $150,000/5 = $30,000
OCF = (Rev. - Exp.)(1 - T) + TD
= ($65,000 - $15,