Question

Pendant Publishing is considering a new product line that has expected sales of $1,100,000 per year for each of the next 5 years. New equipment that is required to produce the new product will cost $1,200,000. The equipment has a useful life of 5 years and a $300,000 salvage value and will be sold at the end of year 5 for its’ salvage value. Total variable costs of the product line are $450,000 per year, total fixed costs (not including depreciation) will be an additional $180,000 per year and the initial working capital investment, to buy inventory, will be $15,000. The discount rate (interest rate) for the project is 10% and the company’s tax rate is 35%. What is the operating cash flow of year 1 for the company?

Answer 1

S No	Particulars	Amount
1	Sales	$ 11,00,000.00
2	Variable Costs	$      4,50,000.00
3	Fixed Costs (Excl Depreciation)	$      1,80,000.00
4	Depreciation	$      1,60,000.00
5	Profit Before Tax [ 1 - 2 - 3 - 4 ]	$      3,10,000.00
6	Tax @ 35%	$      1,08,500.00
7	Profit After Tax [ 5 - 6 ]	$      2,01,500.00
8	Depreciation	$      1,60,000.00
9	Operating Cash Flow [ 7 + 8 ]	$      3,61,500.00

Note: Working Capital is an investment and will return at the end of the life of equipment. While Computing Net present value, investment in working capital is considered as initial outflow and comes back at the end of life of equipment.

Since the amount asked for is Operating cash flow and not discounted cash flow, interest / discount rate is not considered.