Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $3.2 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,580,000 in annual sales, with costs of $817,000. If the tax rate is 35%, what is the OCF for each year of this project? (Enter the answers in dollars. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.)

OCF1	$
OCF2	$
OCF3	$

Answer 1

Computation of Operating Cash flows

S.No	Particulars	Year 1	Year 2	Year 3
A	Annual Sales	$2,580,000	$2,580,000	$2,580,000
B	Annual Cost	$817,000	$817,000	$817,000
C	Depreciation( Wn)	$480,000	$816,000	$571,200
D	EBIT( A-B-C)	$1,283,000	$947,000	$1,191,800
E	Interest	$0	$0	$0
F	EBT( D-E)	$1,283,000	$947,000	$1,191,800
G	Taxes @ 35%( F*0.35)	$449,050.00	$331,450.00	$417,130.00
H	Net Income( F-G)	$833,950.00	$615,550.00	$774,670.00

Working Note: Depreciation

Year	Calculation	Depreciation Amount	Book Value after Depreciation
1	$ 3200000*30% /2 = $ 480000	$480,000	$ 3200000-$ 480000=$ 2720000
2	$ 2720000*30% =$ 816000	$816,000	$ 2720000-$ 816000= $ 1904000
3	$ 1904000*30% = $ 571200	$571,200	$ 1904000-$ 571200=$ 1332800

We know that Operating Cash flow = EBIT + Depreciation - Taxes

Year	EBIT	Depreciation	Taxes	Operating Income = EBIT + Depreciation - Taxes
1	$1,283,000	$480,000.00	$449,050.00	$1,313,950.00
2	$947,000	$816,000.00	$331,450.00	$1,431,550.00
3	$1,191,800	$571,200.00	$417,130.00	$1,345,870.00

OCF1	1313950
OCF2	1431550
OCF 3	1345870

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