Question

Andover is evaluating a project that will increase sales by $274,000 and costs by $189,000. The...

Andover is evaluating a project that will increase sales by $274,000 and costs by $189,000. The project will

initially cost $501,000 for fixed assets that will be depreciated straight-line to a zero book value over the 10-

year life of the project. The applicable tax rate is 25 percent. What is the operating cash flow for this project?

A. $83,385 B. $79,412 C. $76,275 D. $72,140 E. $67,158

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Homework Answers

Answer #1
Solution:
Answer is C. $76,275
Working Notes:
Operating cash flow = Net income after taxes + Depreciation
Computation of operating cash flow
Increase in sales $274,000
Less: Increase in cost $189,000
Less: Annual depreciation $50,100
Net income before taxes $34,900
Less: Taxes @ 25% 8725
[$34,900 x 25% = $8,725 ]
Net after taxes $26,175
Add: Annual Depreciation $50,100
Operating cash flow $76,275
Notes: Annual depreciation = Cost of machine /life of machine
Annual depreciation = $501,000 /10
Annual depreciation = $50,100
Please feel free to ask if anything about above solution in comment section of the question.
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