Question

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $430 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $240 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $174,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $38,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?

Answer 1

Calculation of operating cash flow for year 2 is shown below
Sales	$645,000	1500*430
Variable costs	-$360,000	1500*240
Fixed costs	-$100,000
Depreciation expense	-$58,000	(174000/3)
Income before taxes	$127,000
Taxes @ 34%	-$43,180
Net income	$83,820
Depreciation expense	$58,000
Operating cash flow	$141,820
Thus, operating cash flow for year 2 is $141,820