Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2625901 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,370,000. 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 $2,240,000 in annual sales, with costs of $1,230,000.
If the tax rate is 35 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).)
Required:If the tax rate is 35 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).)
Explanation / Answer
OCF = (Sales - Cost)(1 - tax rate) + (tax rate x Depreciation)
OCF = (2,240,000 - 1,230,000)*(1 - 0.35) + (0.35*2,370,000/3)
OCF = 933000