Question

Wilson, Inc., is considering a new four-year expansion project that requires an initial fixed asset investment of $1,950,000. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will be worthless. The project is estimated to generate $2,145,000 in annual sales, with costs of $1,205,000. If the tax rate is 35%, what is the Operating Cash Flow (OCF) for this project ?

1.

$327,430.28

2.

$374,921.15

3.

$2,277,430.38

4.

$2,324.921.15

5.

$781,625.00

Answer 1

5. $781,625.00

Working:

Calculation of operating cash flow:
Sales			$   21,45,000.00
Cost of sales			-12,05,000.00
Depreciation Expense			-4,87,500.00
Profit Before Tax			4,52,500.00
Tax Expense			-1,58,375.00
Net Income			2,94,125.00
Depreciation Expense			4,87,500.00
Operating Cash flow			$     7,81,625.00
Working:
Straight line depreciation		=	Cost of Building / Useful Life of project
		=	1950000/4
		=	4,87,500
Tax Expense		=	Profit before tax * Tax Expense
		=	4,52,500	* 35%
		=	1,58,375