Calculating Project OCF. Cochrane, Inc., is considering a new three-year expansi

Question

Calculating Project OCF. Cochrane, Inc., is considering a new three-year expansion project that requires, an initial fixed asset investment of $2.1 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$2,150,000 in annual sales, with costs of $1,140,000. If the tax rate is 35 percent, what is the OCF for this project?

Calculating Project NPV.In the previous problem, suppose the required return on the project is 14 percent. What is the project

Explanation / Answer

Sales $2150000
Less: Cost $1140000
Gross profit $1010000
Less: Depreciation ($2100000 / 3 years) $700000
Net income $310000
Less: Income tax (Net income * 0.35) $108500
Net income after tax $201500
Add: Depreciation $700000
Operating Cash Flow $901500

Depreciation is a non - cash expense, hence, added back in the computation of operating cash flow.

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