Question

Problem 9-9 Calculating Project OCF (LO 2] Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,250,000. 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 $2,200,000 in annual sales, with costs of $1,190,000. Required: If the tax rate is 40 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) OCF

Answer 1

Operating Cash Flow = Annual Sales - Costs - Depriciation - Taxes + Depriciation

= 2,200,000 - 1,190,000- (2,250,000/3) - [(2,200,000 - 1,190,000- (2,250,000/3)*40% + (2,250,000/3)

= 2,200,000 - 1,190,000- 750,000 - 104,000 + (2,250,000/3)

= 906,000

OCF = $ 906,000

NOTE : - Depriciation is added back because Depriciation is non cash item.

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Problem 9-9 Calculating Project OCF (LO 2] Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,250,000. 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 $2,200,000 in annual sales, with costs of $1,190,000. Required: If the tax rate is 40 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) OCF