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In: Accounting

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.

Solutions

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

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