Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $4 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,660,000 in annual sales, with costs of $843,000. If the tax rate is 35%, what is the OCF for each year of this project? (Enter the answers in dollars. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.) OCT 1 OCT 2 ост)

Answer 1

Tax rate		35%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3			Total
Opening WDV		$        4,000,000	$       2,800,000	$        1,960,000
Dep Rate		30.00%	30.00%	30.00%
Depreciation		$        1,200,000	$          840,000	$           588,000			$        2,628,000
Closing WDV		$        2,800,000	$       1,960,000	$        1,372,000
Calculation of after-tax salvage value
Cost of machine			$       4,000,000
Depreciation			$       2,628,000
WDV			$       1,372,000
Sale price			$       1,372,000
Profit/(Loss)			$                     -
Tax			$                     -
Sale price after-tax			$       1,372,000
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3
Sale		$        2,660,000	$       2,660,000	$        2,660,000
Less: Operating Cost		$           843,000	$          843,000	$           843,000
Contribution		$       1,817,000	$       1,817,000	$       1,817,000
Less: Depreciation		$        1,200,000	$          840,000	$           588,000
Profit before tax		$           617,000	$          977,000	$       1,229,000
Tax@35%		$           215,950	$          341,950	$           430,150
Profit After Tax		$           401,050	$          635,050	$           798,850
Add Depreciation		$        1,200,000	$          840,000	$           588,000
Cash Profit after-tax		$       1,601,050	$       1,475,050	$       1,386,850