Question

What is the annual operating cash flow for a 10 year project that has annual sales of $650,000, its variable cost are 70% of sales and has annual fixed cost of $130,000. The project requires new equipment at a cost of $50,000 and installation costs of $3,000 and a plant that costs $70,000. Depreciation is under the straight line method and the equipment has an estimated life of 10 years and the plant an estimated life of 30 years. The tax rate is 30% and the discounting rate is 10%.

Round to the nearest two decimal.

Answer 1

Annual Operating Cash Flow is calculated by using the following formula

Annual Operating Cash Flow = [(Sales – Variable Costs – Fixed Costs) (1 – Tax Rate) + [(Depreciation x Tax Rate)]

Sales = $650,000

Variable Costs = $455,000 [$650,000 x 70%]

Fixed Costs = $130,000

Depreciation Expense on Equipment = $5,300 per year [($50,000 + 3,000) / 10 Year]

Depreciation Expense on Plant = $2,333.33 [$70,000 / 30 Years]

Total depreciation Expenses = $7,633.33 [$5,300 + $2,333.33]

Therefore, The Annual Operating Cash Flow = [(Sales – Variable Costs – Fixed Costs) (1 – Tax Rate) + [(Depreciation x Tax Rate)]

= [($650,000 - $455,000 - $130,000) x (1 – 0.30)] + [$7,633.33 x 0.30]

= [$65,000 x 0.70] + [$7,633.33 x 0.30]

= $45,500 + $2,290

= $47,790

“Hence, the annual operating cash flow would be $47,790.00 per year”