Question

Based on the following information, what is the relevant operating cash flow (OCF) associated with the project expected to be in year 3? The project would require an initial investment in equipment of 760,000 dollars that would be depreciated using MACRS where the depreciation rates in years 1, 2, 3, and 4 are 41 percent, 25 percent, 25 percent, and 9 percent, respectively. At the end of the project in 3 years, the equipment would be sold for an expected after-tax cash flow of 18,100 dollars. In year 3 of the project, relevant revenue associated with the project would be 330,700 dollars and relevant costs associated with the project would be 296,600 dollars. The tax rate is 35 percent.

Answer 1

Initial Investment = $760,000

Depreciation Year 3 = 25% * $760,000
Depreciation Year 3 = $190,000

Book Value at the end of Year 4 = $410,000 - $82,000 - $131,200 - $78,720 - $47,232
Book Value at the end of Year 4 = $70,848

Year 3:

Operating Cash Flow = (Revenue - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($330,700 - $296,600) * (1 - 0.35) + 0.35 * $70,848
Operating Cash Flow = $34,100 * 0.65 + 0.35 * $70,848
Operating Cash Flow = $46,961.80