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.

Assume Depreciation Schedule As Follows

Explanation / Answer

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Year 1 Year 2 Year 3 Sales 337500 337500 337500 Less Variable Costs 202500 202500 202500 Less Depreciation 115500 157500 52500 EBT 19500 -22500 82500 Less Tax 6825 -7875 28875 OCF 12675 -14625 53625 Add Depreciation 115500 157500 52500 Net Operating Cash Flow         128175 142875 106125

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