Calculating project OCF Summer tyme Inc. is considering a new year expansion pro
ID: 2663441 • Letter: C
Question
Calculating project OCF Summer tyme Inc. is considering a new year expansion project that requires an initial fixed asset investment of $3.9 million . The fixed asset will be depreciated straight line to zero over the three year tax life, after which time it will be worthless. The projected estimated to generate $2,650,000 in annual sales, with costs of $ 840,000. If the tax rate is 35% what is the OCF for this project?suppose the required return on the project is 12 % . What is the projects NPV?
Explanation / Answer
Annual sales = 2650000
Cost of annual sales = 840000
Annual gross profit = 2650000 - 840000 = 1810000
Annual Depreciation expense = 3.9 million / 3 years = 1300000
Tax rate = 35%
Taxable income = Gross profit - Depreciation = 1810000 - 1300000 = 510000
Tax = 510000*35% = 178500
Annual Operating cash flow = (sales - cost of sales) - tax = 1810000 - 178500 = 1631500
rate of return = r = 12%
NPV = PV of Operating cash flows - Initial investment
= OCF1/(1+r) + OCF2/(1+r)^2 + OCF3/(1+r)^3 - Initial investment
= 1631500/(1+12%) + 1631500/(1+12%) + 1631500/(1+12%) - 3900000
= 1456696.43 + 1300621.81 + 1161269.47 - 3900000
= 18587.71
NPV of project = 18587.71
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