Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $3.8 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30 percent 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 $2,640,000 in annual sales, with costs of $835,000. If the tax rate is 35 percent, what is the OCF for each year of this project?

Answer 1

		Year	0	1	2	3
	A	Initial Cash flow	($3,800,000)
	B	Annual Sales		$2,640,000	$2,640,000	$2,640,000
	C	Costs		($835,000)	($835,000)	($835,000)
	D=B+C	Before Tax income (without depreciation)		$1,805,000	$1,805,000	$1,805,000
	E=D*(1-0.35)	After tax income (without depreciation)		$1,173,250	$1,173,250	$1,173,250
		Depreciation tax Shield:
	F	Book Value at beginning of year		$3,800,000	$2,660,000	$1,862,000
	G=F*0.3	Depreciation for the year		$1,140,000	$798,000	$558,600
	H=F-G	Book Value at the end of the year		$2,660,000	$1,862,000	$1,303,400
	I=G*0.35	Depreciation tax Shield:		$399,000	$279,300	$195,510
	J	Terminal Cash flow(Salvage Value)				$1,303,400
	K=E+I+J	Operating Cash Flow(OCF)		$1,572,250	$1,452,550	$2,672,160