Question

A project with a life of 6 years is expected to provide annual sales of $340,000 and costs of $237,000. The project will require an investment in equipment of $610,000, 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 +/-15 percent. The tax rate is 34 percent. What is the annual operating cash flow for the best-case scenario?

Answer 1

Annual Operating Cash Flow

Annual Sales = $391,000 [$340,000 x 115%]

Annual Costs = $201,450 [$237,000 x 85%]

Depreciation Expense = $1,01,666.67 per year [$610,000 / 6 Years]

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

= [($391,000 – $201,450) x (1 – 0.34)] + [$101,666.67 x 0.34]

= [$189,550 x 0.66] + [$101,666.67 x 0.34]

= $125,103 + $34,566.67

= $159,669.67

“Hence, the annual operating cash flow for the best-case scenario would be $159,669.67”