Question

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.43 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,990,000 in annual sales, with costs of $685,000. If the tax rate is 30 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Answer 1

Calculation of Operating Cash flow for the project
Year	1	2	3
Sales	$1,990,000	$1,990,000	$1,990,000
Less : Costs	$685,000	$685,000	$685,000
Less : Depreciation	$810,000	$810,000	$810,000
Profit before tax	$495,000	$495,000	$495,000
Less : Tax @ 30%	$148,500	$148,500	$148,500
Add : Depreciation	$810,000	$810,000	$810,000
Operating Cash flow	$1,156,500	$1,156,500	$1,156,500
Depreciation per year = Cost / Useful life = $2430000 / 3 years = $8,10,000