Question

Oxygen Optimization is considering the caffeine project, which would involve selling caffeinated oxygen for 1 year. The firm expects sales of caffeinated oxygen to be 72,000 dollars and associated costs from providing caffeinated oxygen (such as tanks, filters, etc.) to be 35,000 dollars. The firm believes that sales of regular oxygen, which is currently sold by the firm, would be 31,000 dollars less with the addition of caffeinated oxygen, and that costs associated with regular oxygen to be 26,000 less with the addition of the caffeinated oxygen. Finally, Oxygen Optimization believes that the introduction of caffeinated oxygen would increase traffic to its facilities, which would increase expected sales of other products (such as masks) by 21,500 dollars more than it would be without the addition of caffeinated oxygen, and increase costs by 14,000 more than it would be without the addition of caffeinated oxygen. What is the operating cash flow (OCF) for year 1 that Oxygen Optimization should use to analyze the caffeine project? The tax rate is 40 percent and the cost of capital is 9.64 percent. Relevant depreciation is expected to be 5,000 dollars.

Answer 1

Answer : Operating cash Flow for year 1 is $25,700

Calculation of Operating Cash Flow

Below is the Table showing calculation of Operating Cash Flow

	Amount
Sale of caffeinated oxygen	72000
Less : Cost of providing caffeinated oxygen	(35000)
Less : Reduction in sale of regular oxygen	(31000)
Add: Saving in cost associated with lowering regular oxygen	26000
Add : Increse in sales of other products	21500
Less: Cost associated with other Products	(14000)
Less : Depreciation	(5000)
Earning Before Taxes	34500
Less : Taxes @40%	(13800)
Earning After Taxes	20700
Add: Depreciation ( Being non cash Item)	5000
Operating Cash Flow for year 1	25700