no more questions riu-yaicu lating Project OCF [LOI] Summer Tyme, Inc., is consi

Question

no more questions riu-yaicu lating Project OCF [LOI] Summer Tyme, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $4.644 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $4128,000 in annual sales, with costs of $1,651,200. Required: If the tax rate is 34 percent, what is the OCF for this project? O $2,130,899 O $2,029,428 O $2,476,800 O $1.927957 O $868,428

Explanation / Answer

Annual depreciation=(Cost-Book value)/Useful life

=(4.644million/4)=$1,161,000

Hence OCF=(Sales-Costs)(1-tax rate)+(Tax savings on depreciation)

=(4,128,000-1,651,200)(1-0.34)+(0.34*1,161,000)

which is equal to

=$2,029,428.

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