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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