OCF1 A company is considering a 5-year project to open a new product line. A new

Question

OCF1

A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $110,000 would be required to manufacture their new product, which is estimated to produce sales of $80,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 45% of sales, and the tax rate at this firm is 31%. If straight-line depreciation is used to calculate annual depreciation, what is the estimated annual operating cash flow from this project? (Answer to the nearest dollar.)

Explanation / Answer

Calculation of estimated annual operating cash flow from the project:

Sales Revenue

$         80,000

Less: Cost of Goods sold = 80000*45% =

$        (36,000)

Less: Depreciation = (110000-0)/5

$        (22,000)

Profit Before tax

$         22,000

Less: Tax = 22000*31% =

$          (6,820)

Profit after tax

$         15,180

Add: Depreciation

$         22,000

Operating cash flow from the project =

$         37,180

Calculation of estimated annual operating cash flow from the project:

Sales Revenue

$         80,000

Less: Cost of Goods sold = 80000*45% =

$        (36,000)

Less: Depreciation = (110000-0)/5

$        (22,000)

Profit Before tax

$         22,000

Less: Tax = 22000*31% =

$          (6,820)

Profit after tax

$         15,180

Add: Depreciation

$         22,000

Operating cash flow from the project =

$         37,180

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