Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2660109 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.22 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 $1,180,000.
If the tax rate is 30 percent, what is the OCF for this project? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.22 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 $1,180,000.
Explanation / Answer
DEPRECIATION PER YEAR = 2220000/3
=740000
OCF = [2190000-1180000-740000]*0.70 + 740000
= 189000 + 740000
= 929000