Question

ou are evaluating a project for your company. You estimate the sales price to be $290 per unit and sales volume to be 3,900 units in year 1; 4,900 units in year 2; and 3,400 units in year 3. The project has a three-year life. Variable costs amount to $140 per unit and fixed costs are $195,000 per year. The project requires an initial investment of $228,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $39,000. NWC requirements at the beginning of each year will be approximately 14 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 8 percent. What is the operating cash flow for the project in year 2?

• $442,560

• $464,000

• $474,480

• $366,560

Answer 1

Calcultion of Operating Cash flow in Year 2

Sales (4900 units@290)............1421000

Less: Variable Cost (4900*140)...-686000

Less: Fixed Cost............................-195000

Less: Depreciation.......................-76000

(228000/3)

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Taxable Income.........................464000.00

Less:tax @21%...,......................-97440.00

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Net income.................................366560.00

Add: Depreciation........................76000.00

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Operating cash flow.....................442560.00

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So OCF for year 2 is 442560

Note: Depreciation is deducted for tax purposes, again it is added as it is non Cash expenditure