Question

Oxygen Optimization is considering the caffeine project, which would involve selling caffeinated oxygen for 1 year. The firm expects sales of caffeinated oxygen to be 66,000 dollars and associated costs from providing caffeinated oxygen (such as tanks, filters, etc.) to be 39,000 dollars. The firm believes that sales of regular oxygen, which is currently sold by the firm, would be 36,000 dollars less with the addition of caffeinated oxygen, and that costs associated with regular oxygen to be 20,000 less with the addition of the caffeinated oxygen. Finally, Oxygen Optimization believes that the introduction of caffeinated oxygen would increase traffic to its facilities, which would increase expected sales of other products (such as masks) by 18,500 dollars more than it would be without the addition of caffeinated oxygen, and increase costs by 12,000 more than it would be without the addition of caffeinated oxygen. What is the operating cash flow (OCF) for year 1 that Oxygen Optimization should use to analyze the caffeine project? The tax rate is 40 percent and the cost of capital is 5.33 percent. Relevant depreciation is expected to be 5,000 dollars.

Answer 1

Operating Cash Flow = (New Revenue - New Cost - Decrease in Revenue of regular oxygen + Decrease in costs of Regular Oxygen + Increase in Revenue of Other products - Increase in costs of other products - Depreciation) * (1 - Tax) + Depreciation

Operating Cash Flow = (66000 - 39000 - 36000 + 20000 + 18500 - 12000 - 5000) * (1 - 0.40) + 5000

Operating Cash Flow = (12500) * (1 - 0.40) + 5000

Operating Cash Flow = 7500 + 5000

Operating Cash Flow = $12500

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