Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2623716 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,080,000 in annual sales, with costs of $775,000. If the tax rate is 35 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
I know the answer is 1,163,250 but I don't know how to get there. Please help and show the steps!
Explanation / Answer
OCF = Net Income + Non Cash Expenses + Change in Working Capital
= [ Sales - COGS - Depre. ]*(1-T) + Depre. + 0
= [ 2080000 - 775000 - 2700000/3 ]*(1-0.35) + 2700000/3 = $1163250
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