Question

What is the operating cash flow for year 5 of project A that Red Royal Industrial should use in its NPV analysis of the project? The tax rate is 25 percent. During year 5, project A is expected to have relevant revenue of 82,000 dollars, relevant variable costs of 16,000 dollars, and relevant depreciation of 13,000 dollars. In addition, Red Royal Industrial would have one source of fixed costs associated with the project A. Yesterday, Red Royal Industrial signed a deal with Anna Advertising to develop a marketing campaign. The terms of the deal require Red Royal Industrial to pay Anna Advertising either 25,000 dollars in 5 years if project A is pursued or 14,000 dollars in 5 years if project A is not pursued. Finally, the equipment purchased for the project would be sold in 5 years for an expected after-tax cash flow of 6,000 dollars.

Answer 1

Year 5
Revenue	82000
Less: Costs	16000
Fixed costs	25000
Depreciation	13000
Profit before tax	28,000
Tax	7000
Net Income	21,000
Add back:Depreciation	13000
OCF	34,000

Hence OCF= $34000 in Year 5. Capital receipts are not considered in Operating cash flows.