Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3,000,000. 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 $3,250,000 in annual sales, with costs of $2,270,000. If the tax rate is 22 percent, what is the OCF for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Initial investment	3,000,000.00	$
LIFE	3 years
Depreciation	1,000,000.00	$
Annual sales	3,250,000.00	$
Costs	2,270,000.00	$
tax	22%

	Amount $
Annual sales	3,250,000.00
Less: Costs	2,270,000.00
Less: Depreciation	1,000,000.00
Profit before tax	(20,000.00)
Tax	-
Profit after tax	(20,000.00)
Add: Depreciation	1,000,000.00
Operating cash flow	980,000.00
Since there is loss, tax is not considered
Cash flow = Profit after tax + depreciation