Quad Enterprises is considering a new three-year expansion project that requires
ID: 2716801 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 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 $2,060,000 in annual sales, with costs of $755,000. 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.)
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 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 $2,060,000 in annual sales, with costs of $755,000. 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.)
Explanation / Answer
Depreciation each year = 2,640,000 / 3 = $880,000
EBIT = Revenue - Costs - depreciation = 2060000 - 755000 - 880000 = 425000
Net income = EBIT - taxes = 425000 - 425000*35% = 276250
Cash Flow From Operating Activities = Net income + Depreciation = 276250 + 880000 = $1,156,250