Cochrane, Inc., is considering a new three-year expansion project that requires

Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,160,000. 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 $2,170,000 in annual sales, with costs of $1,160,000.

If the tax rate is 40 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,160,000. 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 $2,170,000 in annual sales, with costs of $1,160,000.

Explanation / Answer

Sales $ 2,170,000 A Year Cash Flow Cost $ 1,160,000 B 0 $ (2,160,000) EBIT $ 1,010,000 C=A-B 1 $       894,000 Depreciation* $     720,000 D 2 $       894,000 EBT $     290,000 E=C-D 3 $       894,000 TAX @ 40% $     116,000 F=E*40% Net Income $     174,000 G=E-F OCF $     894,000 H=G+D Cost of Fixed Assets $ 2,160,000 Life                       3 Depreciation per year* $     720,000 (2160000/3)

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