A proposed new investment has projected sales of 15,000 units in year 1 and 20,000 units...

A proposed new investment has projected sales of 15,000 units in year 1 and 20,000 units in year 2. The sales price for both years will be $10 per unit. The project will terminate after the second year. Variable costs are expected to be 50% of sales. Fixed costs will be $25,000 per year. The investment will cost $20,000 and will be depreciated straight line to $0 over the 2 year period. The tax rate is 34% for both years and the investment will be worthless after 2 years. Please prepare projected income statements for each of the 2 years and calculate the operating cash flow for each year.

Expert Solution

	Year 1	Year 2
Sales(10 per unit)	1,50,000	2,00,000
Less Variable Cost(50%)	75,000	1,00,000
Contribution	75,000	1,00,000
Less Fixed Cost	25,000	25,000
Less Depreciation(20000/2)	10,000	10,000
Profit Before tax	40,000	65,000
Tax (34%)	13,600	22,100
Profit After tax	26,400	42,900

Operating Cash flow
OCF = Profit after tax + Depreciation – Taxes
	Year 1	Year 2
Profit After tax	26,400	42,900
Add Depreciation	10,000	10,000
Less Tax	13,600	22,100
Operating Cash flow	22,800	30,800

ekkarill92 answered 2 years ago

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