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?
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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