Question

A 7-year project is expected to provide annual sales of $169,000 with costs of $91,000. The equipment necessary for the project will cost $295,000 and will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-10 percent. The tax rate is 34 percent. What is the annual operating cash flow for the worst-case scenario?

Multiple Choice

• $49,689

• $32,009

• $34,320

• $82,969

• $48,649

Answer 1

Answer:

Initial Investment = $295,000
Useful Life = 7 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $295,000 / 7
Annual Depreciation = $42,143

Worst Case Scenario:
Sales = $169,000 * (1 – 0.10) = $152,100
Costs = $91,000 * (1 + 0.10) = $100,100

Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = ($152,100 - $100,100) * (1 - 0.34) + (0.34 * $42,143)
Annual Operating Cash Flow = $48,649