Question

# Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of \$2.32 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate \$1.735 million in annual sales, with costs of \$650,000. If the tax rate is 21 percent, what is the OCF for this project?

Initial Investment = \$2.32 million

Salvage Value = \$0

Life of the project = 3 Years

Now, Depriciation under SLM = (Initial Investment - Salvage Value)/ Life of the project

=(\$2.32 million - 0)/3

=\$ 773333.33

Now to compute the OCF we use the below formula

Operating Cash Flow (OCF) = (Revenue - Cost - Depriciation) (1- Tax Rate) + Depriciation

We add back depriciation as it is a non cash expenditure.

Therefore OCF = (\$ 1735000 - \$ 650000- 773333.33) * (1-0.21) + 773333.33

=\$ 1019550

Therefore Projects operating Cash flow = \$ 1019550

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