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Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset...

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% 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 $2,550,000 in annual sales, with costs of $808,000. If the tax rate is 35%, what is the OCF for each year of this project? (Enter the answers in dollars)

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Expert Solution

Answer :

Calculation of Operating Cash Flows :

OCF1 : 1284550

OCF2 : 1391125

OCF3 : 2521327.5

Below is the table showing calculation :

Year 0 Year 1 Year 2 Year 3
Initial Investment 2900000
Annual Sales 2550000 2550000 2550000
Less :Annual Cost 808000 808000 808000
Less : Depreciation (Working Note ) 435000 739500 517650
Earning before taxes 1307000 1002500 1224350
Taxes @ 35% -457450 -350875 -428523
Earnings After Taxes 849550 651625 795827.5
Add : Depreciation 435000 739500 517650
Plus : Salvage Value 1207850
Less : tax on salvage @ 35% 0
Operating Cash Flows 2900000 1284550 1391125 2521327.5
Working Note :
Year 1 : 2900000 * 30%/2 =435000
Year 2 : (2900000 - 435000) * 30% = 739500
Year 3 : (2900000-435000-739500) * 30% =517650
Book Value = (2900000-435000-739500-517650) = 1207850
Gain on Sale = Salvage Value - Book Value
                          = 1207850 - 1207850
                          = 0

jeff jeffy answered 1 year ago
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