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:

jeff jeffy answered 1 year ago

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