Question

Quad Enterprises is considering a new 5-year expansion project that requires an initial fixed asset investment of $3.888 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless. The project is estimated to generate $3,456,000 in annual sales, with costs of $1382,400.

If the tax rate is 24 percent, what is the OCF for this project?

Answer 1

$ 1,762,500

Annual Sales	3,456,000
Cost of Sales	-1,382,400
Depreciation	-777,600
Profit before tax (x)	1,296,000
Tax Expense (y=x*-24%)	-311,040
Net Income	984,960
Depreciation	777,600
Operating Cash flow (OCF)	1,762,560
Working:
Straight Line Depreciation	=	(Cost - Salvage Value)/Useful Life
	=	(3888000-0)/5
	=	$        7,77,600