Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $3.4 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 $2,600,000 in annual sales, with costs of $823,000. 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

Solution:

Depreciation for the three years are as follow

Year 1=($3400,000*30%)*50%=$510,000

Year 2=($3400,000-$510,000)*30%=$867,000

Year 3=($2890,000-$867,000)*30%=$606,900

Statement showing operating cash flow for each year

Year	1	2	3
Sales	$2,600,000	$2,600,000	$2,600,000
Less:Cost	$823,000	$823,000	$823,000
Less:Depreciation	$510,000	$867,000	$606,900
Profit before tax	$1267,000	$910,000	$1170,100
Less:Tax @35%	$443,450	$318,500	$409,535
Profit after tax	$823,550	$591,500	$760565
Add:depreciation	$510,000	$867,000	$606,900
Operating cash flow	$1,333,550	$1,458,500	$1,367,465

Sale of fixed asset should not be included in operating cash flow as it represent investing activities.