Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $833,800.00 work cell. Further, it will cost the firm $53,200.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $74,800.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $7,400.00. Finally, the firm will invest $10,000.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $903,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 38.00%.

The work cell is estimated to have a market value of $478,000.00 at the end of the fourth year. The firm expects to reclaim 83.00% of the final NWC position.

The cost of capital is 14.00%.

What is the yearly operating cash flow for the project?

Answer 1

>>>>
Purchase Cost of Work Cell = Work Cell cost + Delivery and installation cost of work cell
= $833,800.00 + $53,200.00
= $887,000
>>>>
Depreciation = Purchase Cost of Work Cel / 20 years
= $887,100 / 20 years
= $44,350
>>>>
Calculation of Operating Cash Flows
Partculars	Year 1	Year 2	Year 3	Year 4
Annual Sales (A)	903000	903000	903000	903000
Less: Expenses (B = A*40%)	361200	361200	361200	361200
Less: Depreciation (C )	44350	44350	44350	44350
Profit before Tax (D = A-B-C)	497450	497450	497450	497450
Less: Tax @38% (E = D*38%)	189031	189031	189031	189031
Profit After Tax (F = D-E)	308419	308419	308419	308419
Add back Depreciation (G = C)	44350	44350	44350	44350
Net Operating Cash Flows (H = F+G)	352769	352769	352769	352769
Yearly Operating Cash Flow for the project is $352,769