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What is the operating cash flow (OCF) for year 2 of the health club project that...

What is the operating cash flow (OCF) for year 2 of the health club project that Red Royal Packaging should use in its NPV analysis of the project? Red Royal Packaging operates a(n) pet care center. The firm is evaluating the health club project, which would involve opening a health club. During year 2, the health club project is expected to have relevant revenue of 730,900 dollars, relevant variable costs of 213,000 dollars, and relevant depreciation of 91,400 dollars. In addition, Red Royal Packaging would have one source of fixed costs associated with the health club project. Yesterday, Red Royal Packaging signed a deal with Orange Valley Consulting to develop an advertising campaign for use in the health club project. The terms of the deal require Red Royal Packaging to pay 40,400 dollars to Orange Valley Orange Valley in 2 years from today. The tax rate is 10 percent.

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Answer #1

Answr : Calculatin of Opeating Cash Flow in year 2

Operating Cash flow in Year 2 = Profit After Tax + Depreciation

Calculation of Profit After Tax

Profit After Tax = (Revenue - Cost - Depreciation - Fixed Cost) * (1 - tax rate)

= (730,900 - 213,000 - 91,400 - 40,400) * (1 - 0.10)

= 386100 * 0.90

= 347,490

Note : Given that  Red Royal Packaging signed a deal with Orange Valley Consulting to develop an advertising campaign for use in the health club project. The terms of the deal require Red Royal Packaging to pay 40,400 dollars to Orange Valley Orange Valley in 2 years from today which will be taken as fixed cost in year 2 .

Operating Cash flow in Year 2 = 347,490 + 91,400

= 438,890

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