Question
In: Finance
Quad Enterprises is considering a new 4-year expansion project that requires an initial fixed asset investment...
| Quad Enterprises is considering a new 4-year expansion project that requires an initial fixed asset investment of $2.322 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $2,064,000 in annual sales, with costs of $825,600. |
| If the tax rate is 25 percent, what is the OCF for this
project? |
Multiple Choice
-
$493,425
-
$1,020,229
-
$1,127,621
-
$1,238,400
-
$1,073,925
Solutions
Expert Solution
OCF = $1,073,925
| Particulars | Year 1 |
| Annual sales | 2,064,000 |
| Less: Costs | 825,600 |
| Less: Depreciation* | 580,500 |
| Earnings before taxes | 657,900 |
| Less: Tax at 25% | 164,475 |
| Net Income | 493,425 |
| Add Back depreciation** | 580,500 |
| Operating Cash flow (OCF) | 1,073,925 |
* Depreciation = Value of asset / useful life
**We add back depreciation because it is a non-cash expense.
Excel formulas used:
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