Question

Ausel's is considering a three-year project that will require an investment of $738,000 in manufacturing equipment...

Ausel's is considering a three-year project that will require an investment of $738,000 in manufacturing equipment that is five-year MACRS property for tax purpose. At the end of the project, the equipment can be sold for 18 percent of its original cost. The project is expected to generate annual sales of $679,000 with costs of $321,000. The tax rate is 22 percent and the required rate of return is 15.2 percent.

What is the OCF at the end of Year 2?

Homework Answers

Answer #1
Time line 0 1 2
Cost of new machine -738000
=Initial Investment outlay -738000
5 years MACR rate 20.00% 32.00%
Sales 679000 679000
Profits Sales-variable cost 358000 358000
-Depreciation =Cost of machine*MACR% -147600 -236160
=Pretax cash flows 210400 121840
-taxes =(Pretax cash flows)*(1-tax) 164112 95035.2
+Depreciation 147600 236160
=after tax operating cash flow 311712 331195.2
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