The Lumber Yard is considering adding a new product line that is expected to inc

Question

The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $227,000 and cash expenses by $134,000. The initial investment will require $107,000 in fixed assets that will be depreciated using the 5-year MACRS. The company has a marginal tax rate of 34 percent. What is the project OCF in year 2? (Do not include the dollar sign ($). Round your answer to a whole dollar. (e.g., 4,132)

MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76%

Explanation / Answer

OCF = Net Income + Depreciation

Depreciation = Investment x MACRS (%)

For year 2, Depreciation = 107,000 x 32% = 34,240

OCF = 73,022 + 34,240 = 73,022

Lumber 0 1 2 MACRS 20% 32% Investment -107,000 Sales 227,000 227,000 Expense -134,000 -134,000 Depreciation -21400 -34240 EBT 71,600 58,760 Tax (34%) -24344 -19978.4 Net Income 47,256 38782 OCF 68,656 73,022

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