Question

Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce annual sales of $110,000 with associated costs of $70,000. The project has a life of 4 years. The company ignores bonus depreciation and instead uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 21 percent. What is the annual operating cash flow for this project? (5 points)

Answer 1

SOLUTION:

The values provided in the question are as follows:

Kurt’s Cabinets is looking at a project that will require,

Fixed Assets = $80,000

Net Working Capital = $ 20,000

Annual Sales = $110,000

Associated Cost = $70,000

Life of years of project = 4 Years

Company uses Straight line depreciation Method to zero book value over the life of the project

Salvage Value = 0

Tax Rate = 21 %

Annual Operating Cash Flow for this project = ?

The formula to calculate the Straight line depreciation is as follows:

Depreciation = Cost of fixed asset – salvage value / Asset life time of the project

Depreciation = $80,000-0 /4

Depreciation = $ 20,000

Calculation of the Annual Operating Cash Flow for this project:

Year	Sales	Associated costs	Depreciation	Earning Profit Before Taxes	Taxes @21%	Profit After Taxes	Depreciation	Net Working Capital	Operating Cash Flow
A	B	C	D	E =B-C-D	F=E*0.21	G = E- F	H	I	J =G+H-I
1	$110,000	$70,000	$20,000	$20,000	$4,200	$15,800	$20,000	$20,000	$15,800

Hence, Operating Cash Flow of the project is $ 15,800