Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2765686 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,550,000. 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 $2,300,000 in annual sales, with costs of $1,290,000.
If the tax rate is 35 percent, what is the OCF for this project?
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,550,000. 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 $2,300,000 in annual sales, with costs of $1,290,000.
If the tax rate is 35 percent, what is the OCF for this project?
Explanation / Answer
depreciation on straight-line basis = 2550000/3 = $850,000
Income before tax = $2,300,000 - $1,290,000 - $850,000 = $160000
Net Income after tax = $160000 * 65% = $104000
Annual Operating Cash Flow for the project = $104000 + $850,000 = $954,000