Quad Enterprises is considering a new three-year expansion project that requires
ID: 2826518 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 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 $2,140,000 in annual sales, with costs of $835,000. 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
Initial Investment = $2,880,000
Useful Life = 3 years
Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $2,880,000 / 3
Annual Depreciation = $960,000
Annual Sales = $2,140,000
Annual Cost = $835,000
Tax Rate = 35%
OCF = (Annual Sales - Annual Cost) * (1 - tax) + tax * Annual Depreciation
OCF = ($2,140,000 - $835,000) * (1 - 0.35) + 0.35 * $960,000
OCF = $1,184,250
So, OCF for this project is $1,184,250