Question

10. Rickie’s Rickets is contemplating the purchase of a new $330,000 ricket making machine. The system will be depreciated straight-line to zero over the project’s five-year life. The pretax resale value is $32,000. The system will save $126,000 before taxes per year in costs and will increase working capital by $34,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 35%, what is the OCF for this project? What are the year 0 and year 5 cash flows? show work :)

Answer 1

1)

Annual depreciation = 330,000 / 5 = 66,000

OCF = (savings - depreciation)(1 - tax) + depreciation

OCF = (126,000 - 66,000)(1 - 0.35) + 66,000

OCF = 105,000

2)

Year 0 cash flow = -330,000 + (-34,000) = -364,000

Year 1 cash flow = (126,000 - 66,000)(1 - 0.35) + 66,000 = 105,000

Year 2 cash flow = (126,000 - 66,000)(1 - 0.35) + 66,000 = 105,000

Year 3 cash flow = (126,000 - 66,000)(1 - 0.35) + 66,000 = 105,000

Year 4 cash flow = (126,000 - 66,000)(1 - 0.35) + 66,000 = 105,000

Year 5 non operating cash flow = Market value + NWC - tax(market value - book value)

Year 5 non operating cash flow = 32,000 + 34,000 - 0.35(32,000 - 0)

Year 5 non operating cash flow = 32,000 + 34,000 - 11,200

Year 5 non operating cash flow = 54,800

Year 5 cash flow =54,800 + 105,000 = $159,800