Question

A project with a life of 9 years is expected to provide annual sales of $330,000 and costs of $229,000. The project will require an investment in equipment of $595,000, which will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-10 percent. The tax rate is 40 percent. What is the annual operating cash flow for the best-case scenario?

Multiple Choice

• $94,140

• $104,894

• $120,584

• $89,204

• $53,504

Answer 1

Since it is best case scenario -

we consider +10% for sales - so sales = (1+10%)* $330000= 363000

Cost is -10% so (1-10%) * $229000 = $206100

Depreciation per annum = $595000/ no of years = $595000/ 9 = 66111.11

Profit before tax = sales - cost - depreciaiton = 363000 - 206100 - 66111.11 = $ 90788.89

Net income = (1- tax rate%) * profit before tax = (1-40%)*$90788.89= $ 54473.33

Operating cashflow = net income+ depreciation = $ 54473.33 + 66111.11 = $120584.44; so apprx $ 120584