Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.1 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 $2,150,000 in annual sales, with costs of $1,078,327.

Required:

If the tax rate is 35 percent, what is the OCF for this project? (Do not include the dollar sign ($). Enter your answer in dollars(e.g., 1,234,567), not millions of dollars.)

Answer 1

Annual sales= 2150,000

Annual costs = 1078,327

Annual depriciation = 2100,000/3 = 700,000

Taxable income = revenue - cost - deprciation

= 2150,000 - 1078,327 - 700,000 = 371673

Tax rate = 35%

Taxes paid every year = (0.35) * 371673 = 130,085.55

Net profits after tax = 371,673 - 130,085.55 = 241,587.45

Operating cash flow = net profits after taxes + depriciation = 241,587.45 + 700,000 = 941,587.45

Since the figures for the three years remains same and also the projects is for 3 years,

The operating cash flows for the 3 year project = 3*941587.45

= 2824,762.35

Therefore the OCF of the project is 2,824,762.35