Question

14. Pendant Publishing is considering a new product line that has expected sales of $1,100,000 per year for each of the next 5 years. New equipment that is required to produce the new product will cost $1,200,000. The equipment has a useful life of 5 years and a $300,000 salvage value and will be sold at the end of year 5 for its’ salvage value. Total variable costs of the product line are $450,000 per year, total fixed costs (not including depreciation) will be an additional $180,000 per year and the initial working capital investment, to buy inventory, will be $15,000. The discount rate (interest rate) for the project is 10% and the company’s tax rate is 35%. What is the operating cash flow of year 1 for the company?

A. $305,500

B. $368,500

C. $470,000

D. ($846,500)

Answer #1

Operating cash flows: | |||||

Annual Sales revenue | 11,00,000.00 | ||||

Less: Variable cost | 4,50,000.00 | ||||

Less: Fixed cost | 1,80,000.00 | ||||

Less: Depreciation | 1,80,000.00 | (1200,000-300,000)/5 | |||

Net Income before tax | 2,90,000 | ||||

Less: tax @ 35% | 1,01,500 | (290000*35%) | |||

After tax Income | 1,88,500 | ||||

Add: Depreciation | 1,80,000 | ||||

Operating cash flows: | 3,68,500 | ||||

Answer is B. $ 368,500 | |||||

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