Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $514,811. The fixed asset will be depreciated straight-line to 33,019 over its 3-year tax life, after which time it will have a market value of $113,919. The project requires an initial investment in net working capital of $78,628. The project is estimated to generate $219,081 in annual sales, with costs of $141,830. The tax rate is 0.37 and the required return on the project is 0.11. What is the operating cash flow in years 1 through 3? (Make sure you enter the number with the appropriate +/- sign)

Answer 1

Annual depreciation = (Cost of assets – Salvage value)/Number of useful years

= ($ 514,811 - $ 33,019)/3

                                 = $ 481,792/3 = $ 160,597.33

Annual operating cash flow = Net profit + Depreciation tax shield

                                           = (Sales revenue – Cost) x (1 – Tax rate) + Depreciation x tax rate

                                           = ($ 219,081 - $ 141,830) (1 – 0.37) + $ 160,597.33 x 0.37

                                           = $ 77,251 x 0.63 + $ 59,421.0121

                                           = $ 48,668.13 + $ 59,421.0121

                                           = $ 108,089.1421 or $ 108,089

Operating cash flow in years 1 through 3 is + $ 108,089