Question

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 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 $2,150,000 in annual sales, with costs of $845,000. If the tax rate is 30 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Answer 1

OCF = [(Sales - Costs) x (1 - t)] + [Depreciation x Tax Rate]

= [($2,150,000 - $845,000) x (1 - 0.30)] + [($2,910,000 / 3) x 0.30]

= [$1,305,000 x 0.70] + [$970,000 x 0.30] = $913,500 + $291,000 = $1,204,500