Question

14. Pendant Publishing is considering a new product line that has expected sales of $1,100,000 per...

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)

Homework Answers

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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