Question

Question 4 1 point Number Help Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 400,000 dollars and that is expected to last for 9 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 38 percent, 34 percent, 19 percent, and 9 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 456,000 dollars and relevant, incremental annual costs associated with the project to be 396,000 dollars. The tax rate is 50 percent. What is (X plus Y) if X is the relevant operating cash flow (OCF) associated with the project expected in year 1 of the project and Y is the relevant OCF associated with the project expected in year 4 of the project? Number Question 5 1 point Number Help Based on the following information, what is the relevant operating cash flow (OCF) associated with the project expected to be in year 2? The project would require an initial investment in equipment of 720,000 dollars that would be depreciated using MACRS where the depreciation rates in years 1, 2, 3, and 4 are 40 percent, 22 percent, 22 percent, and 16 percent, respectively. At the end of the project in 2 years, the equipment would be sold for an expected after-tax cash flow of 19,100 dollars. In year 2 of the project, relevant revenue associated with the project would be 328,100 dollars and relevant costs associated with the project would be 275,200 dollars. The tax rate is 20 percent. Number Question 6 1 point Number Help 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 304,000 dollars and total costs of 266,000 dollars if it pursues the Vienna project, and the firm would have total revenue of 263,000 dollars and total costs of 242,000 if it does not pursue the Vienna project. Depreciation taken by the firm would be 74,000 dollars if the firm pursues the project and 40,000 dollars if the firm does not pursue the project. The tax rate is 35 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? Number

Answer 1

Question 4:
Calculation of Operating Cash flows (OCF)
Particulars	Year 1	Year 2	Year 3	Year 4
Annual Revenue (A)	456000	456000	456000	456000
Annual Costs (B)	396000	396000	396000	396000
Depreciaiton (C ) $400,000 * 38%, 34%, 19% , 9%	152000	136000	76000	36000
Profit Before Tax (D = A-B-C)	-92000	-76000	-16000	24000
Tax @50% (E = D*50%)	-46000	-38000	-8000	12000
Profit After Tax (F = D-E)	-46000	-38000	-8000	12000
Add back Depreciation (G = C)	152000	136000	76000	36000
Operating Cash Flows (H = F+G)	106000	98000	68000	48000
(X + Y) = Operating Cash Flow in year 1 + Operating Cash Flow in year 4
= $106,000 + $48,000
= $154,000
Therefore, (X+Y) is $154,000
Question 5:
Calculation of Operating Cash flows (OCF) in Year 2
Particulars	Year 2
Annual Revenue (A)	328100
Annual Costs (B)	275200
Depreciaiton (C ) $720,000 * 22%	158400
Profit Before Tax (D = A-B-C)	-105500
Tax @20% (E = D*20%)	-21100
Profit After Tax (F = D-E)	-84400
Add back Depreciation (G = C)	158400
Operating Cash Flows (H = F+G)	74000
Therefore, Operating Cash flow in year 2 is $74,000
Question 6:
Calculation of Operating Cash flows (OCF) in Year 1
Particulars	Year 1
Annual Revenue (A = $304,000 - $263,000)	41000
Annual Costs (B = $266,000 - $242,000)	24000
Depreciaiton (C = ($74,000 - $40,000)	34000
Profit Before Tax (D = A-B-C)	-17000
Tax @35% (E = D*35%)	-5950
Profit After Tax (F = D-E)	-11050
Add back Depreciation (G = C)	34000
Operating Cash Flows (H = F+G)	22950
Therefore, Operating Cash flow in year 1 is $22,950