A company is evaluating a proposed 4-year project. The depreciable cost will inc

Question

A company is evaluating a proposed 4-year project. The depreciable cost will include the following: $300,000 for the equipment, $20,000 for shipping, and $30,000 for installation. The depreciation life is under the MACRS 3-year class, with a salvage value of $45,000. The inventories will rise by $18,000 and accounts payable will rise by $3,000. In addition, new sales are estimated to be 150,000 units per year at $2.25 per unit. There is a variable operating cost that is 60% of sales and marginal tax rate is 35%. Determine net operating cash flow for Years 1, 2, and 3.

Explanation / Answer

revenues = 150000 * 2.25 = 337500

operating costs = 60% * 3375000 = 202500

depriciation for year 1 = 0.33 * 350000 = 115500

operating income for year 1 = 337500 - 202500 - 115500 = 19500

operating income after taxes for year 1 = 19500 * (1-0.35) = 12675

operating cash flow for year 1 = 12675 + 115500 = 128175

for year 2

depriciation for year 2 = 0.45 * 350000 = 157500

operating income for year 2 = 337500 - 202500 - 157500 = -22500

operating income after taxes for year 2 = -22500 * (1-0.35) = 14625

operating cash flow for year 2 = -14625 + 157500 = 142875

for yer 3

depriciation for year 3 = 0.15 * 350000 = 52500

operating income for year 3 = 337500 - 202500 - 52500 = 82500

operating income after taxes for year 3 = 82500 * (1-0.35) = 53625

operating cash flow for year 3 = 53625 + 52500 = 106125

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