Question

You are evaluating a project for your company. You estimate the sales price to be $200 per unit and sales volume to be 3,000 units in year 1; 4,000 units in year 2; and 2,500 units in year 3. The project has a three-year life. Variable costs amount to $50 per unit and fixed costs are $150,000 per year. The project requires an initial investment of $200,000 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 $30,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?

Answer 1

Tax rate	34%
	Year-1	Year-2	Year-3
Tons	3,000	4,000	2,500
Sale Price	200	200	200
variable cost	50	50	50
Sale	600,000	800,000	500,000
Less: Operating Cost	150,000	200,000	125,000
Contribution	450,000	600,000	375,000
Less: Fixed Cost	150,000	150,000	150,000
Less: Depreciation as per table given below	66,667	66,667	66,667
Profit before tax	233,333	383,333	158,333
Tax	79,333	130,333	53,833
Profit After Tax	154,000	253,000	104,500
Add Depreciation	66,667	66,667	66,667
Operating cash flow	220,667	319,667	171,167
Cost of macine		200,000
Depreciation		200,000
WDV		-
Sale price		30,000
Profit/(Loss)		30,000
Tax		10,200
Sale price after tax		19,800
Depreciation	Year-1	Year-2	Year-3
Cost	200,000	200,000	200,000
Dep Rate	33.33%	33.33%	33.33%
Deprecaition	66,667	66,667	66,667