Question

A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $120,000 would be required to manufacture their new product, which is estimated to produce sales of $40,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 49% of sales, and the tax rate at this firm is 27%. If straight-line depreciation is used to calculate annual depreciation, what is the estimated annual operating cash flow from this project each year? (Answer to the nearest dollar.)

Answer 1

The estimated annual operating cash flow from this project each year

Sales Revenue = $40,000

Cost of goods sold = $19,600 [$40,000 x 49%]

Straight Line Depreciation Expense = $24,000 [$120,000 / 5 Year]

Annual Operating Cash Flow = [(Sales – Cash Expenses) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [($40,000 - $19,600) x (1 – 0.27)] + [$24,000 x 0.27]

= [$20,400 x 0.73] + [$24,000 x 0.27]

= $14,892 + $6,480

= $21,372 per year

“Therefore, the estimated annual operating cash flow from this project each year would be $21,372”