Quad Enterprises is considering a new three-year expansion project that requires
ID: 2734436 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 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 $2,150,000 in annual sales, with costs of $845,000. If the tax rate is 30 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 $
Explanation / Answer
Answer:
We have been provided with the information that,
initial fixed asset investment
2,910,000
depreciation on Straight Line
Life
3 Year
initial Sales
2150000
Less:
Cost
845000
Profit
1305000
Now we will calculate OCF as follow
Depriciation
2910,000/3
970000
DTs
=970000 sx 30%
291000
the OCF for this project
Year
Inflow
Tax 30%
After Tax
Cash Flow
Depriciation
Tax Shelter
Total
Annual Cash Flow
A
B
A+B
1
1305000
391500
913500
291000
1204500
2
1305000
391500
913500
291000
1204500
3
1305000
391500
913500
291000
1204500
initial fixed asset investment
2,910,000
depreciation on Straight Line
Life
3 Year