Question

1. Consider the following income statement:

Sales    $782000

Costs   402000

Depreciation    105000

Taxes 0.24   

Calculate OCF.

2. Consider an asset that costs $1384000 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $199000. If the relevant tax rate is 0.34, what is the aftertax cash flow from the sale of this asset?

3. Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $862000. The fixed asset will be depreciated straight-line to 58000 over its 3-year tax life, after which time it will have a market value of $140000. The project requires an initial investment in net working capital of $50000. The project is estimated to generate $169000 in annual sales, with costs of $143000. The tax rate is 0.31 and the required return on the project is 0.13. What is the total cash flow in year 0? (Make sure you enter the number with the appropriate +/- sign)

4. Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $519000. The fixed asset will be depreciated straight-line to 56000 over its 3-year tax life, after which time it will have a market value of $91000. The project requires an initial investment in net working capital of $45000. The project is estimated to generate $171000 in annual sales, with costs of $106000. The tax rate is 0.39 and the required return on the project is 0.08. What is the operating cash flow in years 1 through 3? (Make sure you enter the number with the appropriate +/- sign)

5. Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $695000. The fixed asset will be depreciated straight-line to 78000 over its 3-year tax life, after which time it will have a market value of $100000. The project requires an initial investment in net working capital of $76000. The project is estimated to generate $183000 in annual sales, with costs of $117000. The tax rate is 0.33 and the required return on the project is 0.12. What is the aftertax salvage value in year 3? (Make sure you enter the number with the appropriate +/- sign)

Answer 1

1)

Operating cash flow = ( sales - costs - depreciation)( 1 - tax ) + depreciation

Operating cash flow = ( 782000 - 402000 - 105000)( 1 - 0.24) + 105000

Operating cash flow = ( 275,000 )( 0.76 ) + 105000

Operating cash flow = $314,000

2)

Annual depreciation = 1384000 / 8 = 173,000

Book value at the end of 7 years = 1384000 - 7 * 173,000 = 173,000

After tax cash flow = sale of asset - tax ( sale of asset - book value)

After tax cash flow = 199000 - 0.34 ( 199000 - 173,000 )

After tax cash flow = 199000 - 8,840

After tax cash flow = $190,160

3)

Total cash flow for year 0 = -initial investment + -net working capital

Total cash flow for year 0 = -862000 + -50000

Total cash flow for year 0 = -$912,000

4)

Annual depreciation = ( 519000 - 56000 ) / 3

Annual depreciation = 154,333.33

operating cash flow in years 1 through 3 = ( sales - costs - depreciation )( 1 - tax ) + depreciation

operating cash flow in years 1 through 3 = ( 171000 - 106000 - 154,333.33 )( 1 - 0.39) + 154,333.33

operating cash flow in years 1 through 3 = -89,333.33 ( 0.61 ) + 154,333.33

operating cash flow in years 1 through 3 = +$99,839.99

5)

After tax salvage value = sale of asset + recovery of net working capital - tax ( market value - book value)

After tax salvage value = 100000 + 76000 - 0.33 ( 100000 - 78000 )

After tax salvage value = 100000 + 76000 - 7,260

After tax salvage value = +$168,740