Question

# A company is considering a new 6-year project that will have annual sales of \$207,000 and...

A company is considering a new 6-year project that will have annual sales of \$207,000 and costs of \$128,000. The project will require fixed assets of \$247,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 34 percent. What is the operating cash flow for Year 2?

Given,

Annual sales = \$207000

Costs = \$128000

Fixed asset = \$247000

Depreciation rate for year 2 = 32.00%

Tax rate = 34% or 0.34

Solution :-

Depreciation for year 2 = Fixed asset x depreciation rate for year 2

= \$247000 x 32.00% = \$79040

Operating cash flow for year 2

= (Annual sales - cost - depreciation for year 2) x (1 - tax rate) + depreciation for year 2

= (\$207000 - \$128000 - \$79040) x (1 - 0.34) + \$79040

= (-\$40) x (0.66) + \$79040

= -\$26.40 + \$79040 = \$79013.60

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