Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $4.4 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,700,000 in annual sales, with costs of $855,000. If the tax rate is 35%, what is the OCF for each year of this project? (Enter the answers in dollars. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.)

OCF1	$
OCF2	$
OCF3	$

Answer 1

Depreciation Schedule
Year	Opening Balance	Depreciation	Closing Balance
A	B	C = B*30%	D = B-C
1	4400000	1320000	3080000
2	3080000	924000	2156000
3	2156000	646800	1509200

Calculation of OCF for each year of this project
Particulars	1	2	3
Annual Sales (A)	2700000	2700000	2700000
Variable Costs (B)	855000	855000	855000
Depreciation (C )	1320000	924000	646800
Profit Before Tax (D = A-B-C)	525000	921000	1198200
Tax @35% (E = D*35%)	157500	276300	359460
Profit After Tax (F = D-E)	367500	644700	838740
Add back Depreciation (G = C)	1320000	924000	646800
Net Operating Cash flows (H = F+G)	1687500	1568700	1485540

OCF₁ = $1,687,500

OCF₂ = $1,568,700

OCF₃ = $1,485,540