Question

Bad Company has a new 4-year project that will have annual sales of 9,200 units. The price per unit is $20.70 and the variable cost per unit is $8.45. The project will require fixed assets of $102,000, which will be depreciated on a 3-year MACRS schedule. The annual depreciation percentages are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. Fixed costs are $42,000 per year and the tax rate is 40 percent. What is the operating cash flow for Year 3?

Answer 1

Operating Cash Flow for Year 3

Annual Sales Revenue = $190,440 [9,200 units x $20.70 per unit]

Variable Cost = $77,740 $190,440 [9,200 units x $8.45 per unit]

Fixed Expenses = $42,000

Depreciation Expense = $15,106.20 [$102,000 x 14.81%]

Therefore, the Operating Cash Flow for Year 3 = [(Annual Sales – Variable Costs – Fixed Expenses) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [($190,440 - $77,740 - $42,00) x (1 – 0.40)] + [$15,106.20 x 0.40]

= [$70,700 x 0.60] + [$15,106.20 x 0.40]

= $42,420 + $6,042.48

= $48,462.48

“Therefore, the Operating Cash Flow for Year 3 will be $48,462.48”