Question

Bobcat Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.10 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.45 million in annual sales, with costs of $495,000. If the tax rate is 21 percent, what is the OCF for this project? (Do not round intermediate calculations.) Multiple Choice $788,465.45 $842,922.10 $901,450.00 $767,150 $922,187.45

Answer 1

Answer is $901,450.00

Initial Investment = $2,100,000
Useful Life = 3 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $2,100,000 / 3
Annual Depreciation = $700,000

Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = ($1,450,000 - $495,000) * (1 - 0.21) + 0.21 * $700,000
Annual Operating Cash Flow = $955,000 * 0.79 + 0.21 * $700,000
Annual Operating Cash Flow = $901,450