\"9. Calculating Project OCF [L01] Summer Tyme , Inc., is considering a new thre
ID: 2665308 • Letter: #
Question
"9. Calculating Project OCF [L01]
Summer Tyme , Inc., is considering a new three-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 its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,650,000 in annual sales, with costs of $840,000. If the tax rate is 35 percent, what is the OCF (operating cash flow) for this project?"
In the previous problem, suppose the required return on the project is 12 percent. What is the project’s NPV (net present value)?
Explanation / Answer
depreciation = $3,900,000/3 = $1,300,000 per year
OCF = EBIT - tax + depreciation
OCF = $5,100,000 - $178,500 + $1,300,000 = $1,631,500
Sales 26,50,000 less cost 840000 depreciation 13,00,000 EBIT 5,10,000 tax@35% 178500 Net Income 3,31,500Related Questions
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