Question

Valley Club is considering adding a miniature golf course to its facility. The course would cost $44,000, would be depreciated on a straight-line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $33,000 a year with $9,000 of that amount being variable cost. The fixed cost would be $6,200. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the operating cash flow of this project for year 1 to year 4 at a tax rate of 20 percent?

a) $13,992

b) $15,100

c) $14,154

d) $16,440

Answer 1

d) $16,440

Working;

Revenue			$       33,000
Variable cost			-9,000
Contribution Margin			24,000
Fixed cost			-6,200
Depreciation			-11,000
Earning before tax			6,800
Tax Expense			-1,360
Net Income			5,440
Depreciation			11,000
Operating cash flow			$       16,440
Working:
Straight line depreciation		=	(Cost - Salvage Value)/Useful life
		=	(44000-0)/4
		=	$       11,000
Tax expense		=	Profit before tax * Tax rate
		=	6,800	* 20%
		=	1,360