Check My Work 13-1: Identifying Relevant Cash Flows in net operating working cap

Question

Check My Work 13-1: Identifying Relevant Cash Flows in net operating working capital. The company's tax rate is 35%. b. The company spent and expensed $150,000 on research related to the new product last year. Would this change your answer? c. Rather than bild new facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million How would this affect your answer? The project's cost will [ Increase Hide Check My Work 0n-Icon Key 1 of

Explanation / Answer

1) Initial Investment = Equipment Cost + NWC = 11,000,000 + 3,000,000 = 14,000,000

2) Operating Cash Flows (OCF) = Net Income + Depreciation

Net Income = (Sales - Operating Cost - Depreciation - Interest Expense) x (1 - tax rate)

= (25 - 7 - 5 - 5) x (1 - 35%)

= 5.20 million

OCF = 5.20 + 5 = 10.20 million = 10,200,000

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