Question

Quad Enterprises is considering a new 3yr expansion project that requires an initial fixed asset investment...

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?

Homework Answers

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

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