Question

Fairfax Paint operates stores in Virginia. The firm is evaluating the Vienna project, which would involve opening a new store in Vienna. During year 1, Fairfax Paint would have total revenue of 399,000 dollars and total costs of 241,000 dollars if it pursues the Vienna project, and the firm would have total revenue of 331,000 dollars and total costs of 194,000 if it does not pursue the Vienna project. Depreciation taken by the firm would be 85,000 dollars if the firm pursues the project and 57,000 dollars if the firm does not pursue the project. The tax rate is 15 percent. What is the relevant operating cash flow (OCF) for year 1 of the Vienna project that Fairfax Paint should use in its NPV analysis of the Vienna project?

Answer 1

Description	With Vienna Project	Without Vienna Project	Incremental cash
Total revenue	$        399,000.00	$                    331,000.00	$       68,000.00
Total cost	$        241,000.00	$                    194,000.00	$       47,000.00
Operating profit	$        158,000.00	$                    137,000.00	$       21,000.00
Depreciation	$           85,000.00	$                      57,000.00	$       28,000.00
Net profit	$           73,000.00	$                      80,000.00	$        (7,000.00)
Tax @	$           10,950.00	$                      12,000.00	$        (1,050.00)
Profit after tax	$           62,050.00	$                      68,000.00	$        (5,950.00)
Add depreciation	$           85,000.00	$                      57,000.00	$       28,000.00
Cashflow after tax	$        147,050.00	$                    125,000.00	$       22,050.00
So incremental cashflow of $ 22,050 will be considered for NPV analysis.