Question

Oxygen Optimization is considering the caffeine project, which would involve selling caffeinated oxygen for 1 year. The firm expects sales of caffeinated oxygen to be 93,000 dollars and associated costs from providing caffeinated oxygen (such as tanks, filters, etc.) to be 60,000 dollars. The firm believes that sales of regular oxygen, which is currently sold by the firm, would be 32,000 dollars less with the addition of caffeinated oxygen, and that costs associated with regular oxygen to be 22,000 less with the addition of the caffeinated oxygen. Finally, Oxygen Optimization believes that the introduction of caffeinated oxygen would increase traffic to its facilities, which would increase expected sales of other products (such as masks) by 25,500 dollars more than it would be without the addition of caffeinated oxygen, and increase costs by 14,000 more than it would be without the addition of caffeinated oxygen. What is the operating cash flow (OCF) for year 1 that Oxygen Optimization should use to analyze the caffeine project? The tax rate is 30 percent and the cost of capital is 17.94 percent. Relevant depreciation is expected to be 4,000 dollars.

Answer 1

The operating cash flow should include only the net incremental cash flows attributable to selling caffeinated oxygen .Following screenshot shows all such cash flows:

So, the OCF of $25,350 should be used.