Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.28 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,648,000 in annual sales, with costs of $627,000. If the tax rate is 22 percent, what is the OCF for this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) OCFT

Answer 1

Annual Depreciation = (Initial Fixed asset investment - salvage value) / Useful life

Annual Depreciation = $2,280,000 / 3 = $760,000

Computation of Operating Cash Flow:

Annual sales = $1,648,000

Less: Annual cost = ($627,000)

Less: Depreciation = ($760,000)

EBIT = $261,000

Less: tax (22%) = ($57,420)

Net Operating Income = $203,580

Add: Depreciation = $760,000

Operating Cash Flow = $963,580