Question

Quad Enterprises is considering a new 3yr expansion project that requires an initial fixed asset investment of $2.4 million. The fixed asset will be depreciated straight-line to zero over its 3yr life after which it will be worthless. The project is estimated to generate $2,550,000 in annual sales, with operating costs of $1,180,000, not including depreciation cost. If the tax rate is 35%, what is the annual operating cash flow for this project?

Answer 1

Cost of Equipment = $2,400,000

Annual Depreciation = (Cost of Equipment – Salvage Value) / No of Years
                      = ($2,400,000 – 0) /3
                      = $800,000

Calculation of annual operating cash flow from this project

PARTICLUARS	Operating Cash Flow at Year 1 to 3
Annual Sales	$2,550,000
Operating Costs	$1,180,000
Depreciation	$800,000
EBIT	$570,000
Income Tax @ 35%	$199,500
Unlevered Net Income	$370,500
ADD : Depreciation	$800,000
Operating Cash Flow	$1,170,500

Annual Operation cash flow from year 1 to 3 is $1,170,500
Cash Outflow at Y0 = $2,400,000