Question

A 7-year project is expected to provide annual sales of $217,000 with costs of $97,000. The equipment necessary for the project will cost $355,000 and will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-10 percent. The tax rate is 34 percent. What is the annual operating cash flow for the worst-case scenario?

Answer 1

Cost of Project = $355,000
Useful Life = 7 years

Annual Depreciation = Cost of Project / Useful Life
Annual Depreciation = $355,000 / 7
Annual Depreciation = $50,714.29

Base Case:

Sales = $217,000
Costs = $97,000

Worst Case:

Sales = $217,000 * (1 - 0.10)
Sales = $195,300

Costs = $97,000 * (1 + 0.10)
Costs = $106,700

Annual OCF = (Sales - Costs) * (1 - tax) + tax * Depreciation
Annual OCF = ($195,300 - $106,700) * (1 - 0.34) + 0.34 * $50,714.29
Annual OCF = $88,600 * 0.66 + 0.34 * $50,714.29
Annual OCF = $75,718.86

So, annual operating cash flow for the worst case scenario is $75,718.86