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 OCF check work

Explanation / Answer

Calculation of OCF

Particulars

Amount

($)

Sales

19,50,000

    Less: Cost

(10,60,000)

Profit before Depreciation & Tax

8,90,000

   Less: Depreciation (WN)

(6,20,000)

Profit Before Tax

2,70,000

   Less: Tax @ 35%

(94,500)

Profit after Tax

1,75,500

    Add: Depreciation

6,20,000

Operation Cash Inflow

7,95,500

WN Calculation of Depreciation

Depreciation = Cost of Asset / Life of Asset = 18,60,000/3 = $6,20,000

Particulars

Amount

($)

Sales

19,50,000

    Less: Cost

(10,60,000)

Profit before Depreciation & Tax

8,90,000

   Less: Depreciation (WN)

(6,20,000)

Profit Before Tax

2,70,000

   Less: Tax @ 35%

(94,500)

Profit after Tax

1,75,500

    Add: Depreciation

6,20,000

Operation Cash Inflow

7,95,500

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