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ABC, Inc. is considering a new project requiring a $270,000 initial investment in equipment having a...

ABC, Inc. is considering a new project requiring a $270,000 initial investment in equipment having a useful life of 3 years with zero expected salvage value. The investment will produce $220,000 in annual revenues and $180,000 in annual costs. Assume a tax rate of 30% and straight-line depreciation. What is the operating cash flow per year?

$118,000

$67,000

$91,000

$69,000

$55,000

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Answer #1

Operating cash flow = Profit after tax + Depreciation

Calculation of profit after tax :

Annual Revenue. (a) = $220,000

Annual costs. (b) = $180,000

Profit before tax. ( c = a - b. ). = $ 40,000

Tax rate @ 30%. (d) =. $.12,000

Profit after tax ( e= c- d ) = $ 28,000

Depreciation under straight line method =

=( Original cost - salvage value ) ÷ expected life

= ($ 270,000 - 0 ) ÷ 3 years

= $ 90,000

Operating cash flow = $28,000 + $90,000

= $ 118,000

So, the correct answer is $118,000

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