Quad Enterprises is considering a new three-year expansion project that requires
ID: 2741147 • 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?
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?
Explanation / Answer
Annual depreciation of fixed asset = $2.64 million / 3 years = $880,000
Annual sales = $2,060,000
Annual costs = $755,000
Tax rate = 35%
Net operating income = Annual sales - Annual costs - Depreciatione expense = $2,060,000 - $755,000 - $880,000 = $425,000
Net income after taxes = Net operating income * (1 - tax rate ) = $425,000 * (1-0.35) = $276,250
Operating cash flows = Net income after taxes + Depreciation expense = $276,250 + $880,000 = $1,156,250
Hence, Answer is $1,156,250