A B Keiper, Inc., is considering a new three-year expansion project that require

Question

A B Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 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 $2,190,000 in annual sales, with costs of $815,000. If the tax rate is 35 percent, what is the OCF for this project? $2,900,000 2,190,000 815,000 Asset investment Estimated annual sales Costs Tax rate "Depreciation straight-line 10 to zero over tax life 12 13 Complete the following analysis. Do not hard code values in your calculations. 14 15 Sales 16 17 Depreciation 18 19 20 $ 2,190,000.00 815,000.00 Costs EBT Taxes Net income Sheet1

Explanation / Answer

Depreciation per Year = Cost of Asset / Life of Asset in years = $2,900,000/ 3 = 966,666.67

Depreciation does not involve any cash outflow, so will add this back to net income to arrive at operating cash flows. Depreciation is used only to compute taxes correctly.

Sales $2,190,000.00 Less: Costs $815,000.00 Less: Depreciation $966,666.67 EBT $408,333.33 Less: Taxes @35% $14,291.67 Net Income $394,041.66 Add: Depreciation $966,666.67 Operating Cash flows $1,360,708.33

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