Question

Question 11 1 point Number Help Oxygen Optimization is considering the caffeine project, which would involve selling caffeinated oxygen for 1 year. The firm expects sales of caffeinated oxygen to be 62,000 dollars and associated costs from providing caffeinated oxygen (such as tanks, filters, etc.) to be 30,000 dollars. The firm believes that sales of regular oxygen, which is currently sold by the firm, would be 37,000 dollars less with the addition of caffeinated oxygen, and that costs associated with regular oxygen to be 21,000 less with the addition of the caffeinated oxygen. Finally, Oxygen Optimization believes that the introduction of caffeinated oxygen would increase traffic to its facilities, which would increase expected sales of other products (such as masks) by 20,500 dollars more than it would be without the addition of caffeinated oxygen, and increase costs by 11,000 more than it would be without the addition of caffeinated oxygen. What is the operating cash flow (OCF) for year 1 that Oxygen Optimization should use to analyze the caffeine project? The tax rate is 30 percent and the cost of capital is 11.32 percent. Relevant depreciation is expected to be 8,000 dollars. Number

Answer 1

Solution :- As Introduction of Caffeinated Oxygen

New Sales = $62,000

Sale of Other Product increased = $20,500

Reduction in Sale of Old Product = $37,000

Therefore Net New Sales Increased = $62,000 + $20,500 - $37,000 = $45,500

Cost of New Sales = $30,000

Cost due to Sale of Other Product increased = $11,000

Cost Saving due to Reduction in Sale of Old Product = $21,000

Net Annual Cost = $30,000 + $11,000 - $21,000 = $20,000

Yearly Profit = $45,500 - $20,000 = $25,000

Depreciation = $8,000

Profit before tax = $25,000 - $8,000 = $17,000

Tax on profit = $17,000 * 30% = $5,100

Profit after tax = $17,000 - $5,100 = $11,900

Add :- Depreciation as Non Cash Item

So Net Operating Cash flow = $11,900 + $8,000 = $19,900

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