Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2,338,197. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $2,093,051 in annual sales, with costs of $1,748,698. If the tax rate is 0.28 , what is the OCF for this project?

Answer 1

Initial Fixed Assets value = $2,338,197

Annual Depreciation of fixed assets = Asset Value/Life of asset

= $2,338,197/3

= $ 779,399

Calculating the Operating Cash flow(OCF) of the project:-

OCF = (Sales - Costs)(1-Tax Rate) + Depreciation(Tax rate)

OCF = (2093,051 - 1748,698)(1-0.28) + (779,399)(0.28)

OCF = 247,934.16 + 218,231.72

OCF = $ 466,165.88

So, OCF of the project is $ 466,165.88

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