Question

A project with a life of 6 years is expected to provide annual sales of $460,000 and costs of $333,000. The project will require an investment in equipment of $790,000, which will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-15 percent. The tax rate is 34 percent. What is the annual operating cash flow for the best-case scenario?

A. 50,080

B. 162,327

C. 128,390

D. 207,094

E. 167,742

Answer 1

Tax rate		34%
Calculation of annual depreciation
Depreciation		Year-1
Cost		$           790,000
Dep Rate		16.67%
Depreciation		$           131,667
Calculation of annual operating cash flow
		Base case	Best case
Sale		$           460,000	$          529,000	460000*115%
Less: Operating Cost		$           333,000	$          283,050	333000*85%
Contribution		$           127,000	$          245,950
Less: Depreciation		$           131,667	$          131,667
Profit before tax		$             (4,667)	$          114,283
Tax@34%		$              (1,587)	$             38,856
Profit After Tax		$             (3,080)	$            75,427
Add Depreciation		$           131,667	$          131,667
Cash Profit after-tax		$           128,587	$          207,094
So option D is the correct answer