Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2628273 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. 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 $2,230,000 in annual sales, with costs of $1,220,000.
If the tax rate is 40 percent, what is the OCF for this project?
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. 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 $2,230,000 in annual sales, with costs of $1,220,000.
If the tax rate is 40 percent, what is the OCF for this project?
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Operating Cash Flow = (Sales - Costs - Depreciation)*(1-Tax Rate) + Depreciation
Depreciation = Cost/EstimatedLife = 2340000/3 = 780000
Operating Cash Flow = (2230000 - 1220000 - 780000)*(1-.40) + 780000 = $918000
Answer is $918000.
Thanks.