Question

What is the operating cash flow (OCF) for year 2 of the bar project that Violet Sky Packaging should use in its NPV analysis of the project? Violet Sky Packaging operates a(n) race track. The firm is evaluating the bar project, which would involve opening a bar. During year 2, the bar project is expected to have relevant revenue of 908,700 dollars, relevant variable costs of 314,800 dollars, and relevant depreciation of 56,300 dollars. In addition, Violet Sky Packaging would have one source of fixed costs associated with the bar project. Yesterday, Violet Sky Packaging signed a deal with Orange Valley Media to develop an advertising campaign for use in the bar project. The terms of the deal require Violet Sky Packaging to pay 20,300 dollars to Orange Valley Orange Valley in 2 years from today. The tax rate is 10 percent.

Answer 1

For calculating operating cash flow at year 2, we will first calculate net profit at year 2 and then make necessary adjustments for computation of Operating cash Flow.

Calculation of Net Profit at Year 2
Particulars	Amount
	Revenue	$908,700.00
Less:	VC	$314,800.00
	Contribution	$593,900.00
Less:	Fixed cost:Advertisement cost	$20,300.00
	Profit Before Tax & depreciation	$573,600.00
Less:	Depreciation	$53,600.00
	Profit Before Tax	$520,000.00
Less:	Tax @ 10%	$52,000.00
Net Profit after Tax	$468,000.00
Calculation of Operating Cash Flows at year 2
Particulars	Amount
	Net profit for the year	$468,000
Add:	Non cash Item: Depreciation	$53,600
Operating cash flow	$521,600

Thus, Operating cash Flows of year 2 for the purpose of computing NPV is $ 521600