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