Question

The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $235,000 and cash expenses by $138,000. The initial investment will require $99,000 in fixed assets that will be depreciated using the 5-year MACRS. The company has a marginal tax rate of 37 percent. What is the project OCF in year 2? (Do not include the dollar sign ($). Round your answer to a whole dollar. (e.g., 4,132)

Answer 1

Initial Investment = $99,000

Depreciation, Year 2 = 32.00% * $99,000
Depreciation, Year 2 = $31,680

Operating Cash Flow, Year 2 = (Sales - Expenses) * (1 - tax) + tax * Depreciation
Operating Cash Flow, Year 2 = ($235,000 - $138,000) * (1 - 0.37) + 0.37 * $31,680
Operating Cash Flow, Year 2 = $97,000 * 0.63 + 0.37 * $31,680
Operating Cash Flow, Year 2 = $72,832

So, OCF in year 2 is $72,832