Question

Ausel’s is considering a ten-year project that will require $850,000 for new fixed assets that will...

Ausel’s is considering a ten-year project that will require $850,000 for new fixed assets that will be depreciated straight-line to a zero book value over the ten years. At the end of the project, the fixed assets can be sold for 15 percent of their original cost. The project is expected to increase the annual sales of $928,000 and costs of $721,000. The tax rate is 35 percent and the required rate of return is 14.6 percent. What is the operating cash flow for this project?

$164,300

$122,000

$219,550

$175,000
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Answer #1

Given,

Fixed asset cost = $850000

Project life = 10 years

Annual sales = $928000

Costs = $721000

Tax rate = 35% or 0.35

Solution :-

Annual depreciation = Fixed asset cost project life

= $850000 10 years = $85000

Operating cash flow = (annual sales - costs - depreciation) x (1 - tax rate) + depreciation

= ($928000 - $721000 - $85000) x (1 - 0.35) + $85000

= ($122000) x (0.65) + $85000

= $79300 + $85000 = $164300

Thus, the operating cash flow for this project is $164300.

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