H. Cochran, Inc., is considering a new three-year expansion project that require

Question

H. Cochran, 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? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

OCF = $_______

Explanation / Answer

Annual depreciation = 2,340,000 / 3 = 780,000

Operating cash flow = ( Sales - costs - depreciation)( 1 - tax ) + depreciation

Operating cash flow = ( 2,230,000 - 1,220,000 - 780,000)( 1 - 0.4 ) + 780,000

Operating cash flow = ( 230,000 ) ( 0.6 ) + 780,000

Operating cash flow = $918,000

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