Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $4.9 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30 percent per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,750,000 in annual sales, with costs of $870,000. If the tax rate is 35 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round your intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

Answer 1

Year (n)	Initial fixed asset investment Initial outlay	CCA depreciation	Depreciation amount (D)	Salvage value	Annual Sales	Annual Cost	EBITDA (annual Revenue - annual cost)	EBIT (EBITDA - depreciation)	Income taxes (EBIT*35%)	Operating cash flow (EBIT - taxes + depreciation)
0	$4,900,000									-$4,900,000
1		30%	$1,470,000		$2,750,000	$870,000	$1,880,000	$410,000	$143,500	$1,736,500
2		30%	$1,029,000		$2,750,000	$870,000	$1,880,000	$851,000	$297,850	$1,582,150
3		30%	$720,300	$1,680,700	$2,750,000	$870,000	$1,880,000	$1,159,700	$405,895	$3,154,805

Note: The salvage value of asset at the end of year 3 is equal to its book value under the UCC of the class therefore no direct tax effects and this value will be added to operating cash flow of year 3

Formulas used in excel calculation: