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 55,000 dollars and associated costs from providing caffeinated oxygen (such as tanks, filters, etc.) to be 22,000 dollars. The firm believes that sales of regular oxygen, which is currently sold by the firm, would be 32,000 dollars less with the addition of caffeinated oxygen, and that costs associated with regular oxygen to be 25,000 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 28,500 dollars more than it would be without the addition of caffeinated oxygen, and increase costs by 7,000 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 10 percent and the cost of capital is 13.78 percent. Relevant depreciation is expected to be 2,000 dollars.

Answer 1

Answer :

Calculation of Operating Cash Flow

Below is the Table showing calculation of Operating Cash Flow

	Amount
Sale of caffeinated oxygen	55000
Less : Cost of providing caffeinated oxygen	(22000)
Less : Reduction in sale of regular oxygen	(32000)
Add: Saving in cost associated with lowering regular oxygen	25000
Add : Increse in sales of other products	28500
Less: Cost associated with other Products	(7000)
Less : Depreciation	(2000)
Earning Before Taxes	45500
Less : Taxes @10%	(4550)
Earning After Taxes	40950
Add: Depreciation ( Being non cash Item)	2000
Operating Cash Flow for year 1	42950