Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2653636 • 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.)
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.)
Explanation / Answer
Depreciation = 2700,000/3 = 900,000
OCF for this project = (Annual Sale -Cost)*(1-Tax Rate) + Depreciation * Tax rate
OCF for this project = (2080000-775000)*(1-0.35) + 900000*0.35
OCF for this project = $ 1,163,250
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