Cochrane, Inc., is considering a new three-year expansion project that requires

Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. 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 $2,230,000 in annual sales, with costs of $1,220,000.

If the tax rate is 40 percent, what is the OCF for this project?

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. 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 $2,230,000 in annual sales, with costs of $1,220,000.

If the tax rate is 40 percent, what is the OCF for this project?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Operating Cash Flow = (Sales - Costs - Depreciation)*(1-Tax Rate) + Depreciation

Depreciation = Cost/EstimatedLife = 2340000/3 = 780000

Operating Cash Flow = (2230000 - 1220000 - 780000)*(1-.40) + 780000 = $918000

Answer is $918000.

Thanks.

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