Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2642038 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. 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 $1,950,000 in annual sales, with costs of $1,060,000. Required: If the tax rate is 35 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567 OCF check workExplanation / Answer
Calculation of OCF
Particulars
Amount
($)
Sales
19,50,000
Less: Cost
(10,60,000)
Profit before Depreciation & Tax
8,90,000
Less: Depreciation (WN)
(6,20,000)
Profit Before Tax
2,70,000
Less: Tax @ 35%
(94,500)
Profit after Tax
1,75,500
Add: Depreciation
6,20,000
Operation Cash Inflow
7,95,500
WN Calculation of Depreciation
Depreciation = Cost of Asset / Life of Asset = 18,60,000/3 = $6,20,000
Particulars
Amount
($)
Sales
19,50,000
Less: Cost
(10,60,000)
Profit before Depreciation & Tax
8,90,000
Less: Depreciation (WN)
(6,20,000)
Profit Before Tax
2,70,000
Less: Tax @ 35%
(94,500)
Profit after Tax
1,75,500
Add: Depreciation
6,20,000
Operation Cash Inflow
7,95,500