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 $1.860,000. 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 $1.950,000 in annual sales, with costs of $1,060,000. Required: If the tax rate is 35 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Explanation / Answer

Sale = 1950000

Less: Cost of sales = 1060000

Operating Income = 890000

Depreciation = 620000 (1860000 / 3)

Less: Tax = 94500 ( 890000 - 620000) * 0.35

OCF = 1415500 ( 890000 + 620000 - 94500 ) (Dep is assumed to be included in total cost of sales)

OCF of project = 4246500 ( 1415500 *3)

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