Question

ABC Company has a proposed project that will generate sales of 455 units annually at a selling price of $192 each. The fixed costs are $7,319 and the variable costs per unit are $66. The project requires $33,150 of equipment that will be depreciated on a straight-line basis to a zero book value over the 13-year life of the project. That is, depreciation each year is $33,150/13. The tax rate is 34 percent. What is the operating cash flow?

Answer 1

Annual Revenue = Units sold*Sale Price = 455 units*$192 = $87,360

Annual Fixed Costs = $7,319

Annual Variable Costs = Units sold*Variable cost per unit = 455 units*$66 per unit = $30,030

Annual Depreciation = $33,150/13 years = $2,550 per year

Tax saving on depreciation = Depreciation*tax rate = $2,550*34% = $867

Annual Operating cash flow = [(Annual Revenue-Annual Fixed Cost-Annual variable cost)*(1-tax rate)]+tax saving on depreciation

Annual Operating cash flow = [($87,360-$7,319-$30,030)*(1-0.34)]+$867 = ($50,011*0.66)+$867

= $33,007+$867 = $33,874