What is the operating cash flow (OCF) for year 3 of the hair salon project that...

What is the operating cash flow (OCF) for year 3 of the hair salon project that Yellow Sand Industrial should use in its NPV analysis of the project? Yellow Sand Industrial operates a(n) medical clinic. The firm is evaluating the hair salon project, which would involve opening a hair salon. During year 3, the hair salon project is expected to have relevant revenue of 602,400 dollars, relevant variable costs of 203,700 dollars, and relevant depreciation of 97,000 dollars. In addition, Yellow Sand Industrial would have one source of fixed costs associated with the hair salon project. Yesterday, Yellow Sand Industrial signed a deal with Blue Eagle Marketing to develop an advertising campaign for use in the hair salon project. The terms of the deal require Yellow Sand Industrial to pay 25,100 dollars to Blue Eagle Blue Eagle in 3 years from today. The tax rate is 20 percent.

Solutions

Expert Solution

Compute the annual fixed cost, using the equation as shown below:

Annual fixed cost = Advertising cost/ 3 years

= $25,100/ 3 years

= $8,366.6666666

Hence, the annual fixed cost is $8,366.66666666.

Compute the income before taxes, using the equation as shown below:

Income before taxes = Revenues – Variable cost – Depreciation – Fixed cost

= $602,400 - $203,700 - $97,000 - $8,366.66666666

= $293,333.333334

Hence, the income before taxes is $293,333.333334.

Compute the operating cash flow, using the equation as shown below:

Operating cash flow = {Income before taxes*(1 – Tax rate)} + Depreciation

= {$293,333.3333334*(1 – 0.20)} + $97,000

= $234,666.666668 + $97,000

= $331,666.666668

Hence, the operating cash flow is $331,666.666668.

jeff jeffy answered 1 year ago

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