Question

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?

Answer 1

Answer

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