Question

Brisk inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1,740,757. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $2,205,200 in annual sales, with costs of $1,676,180. If the tax rate is 0.33 , what is the OCF for this project?

Answer 1

Time line		0	1	2	3
Cost of new machine		-1740757
=Initial Investment outlay		-1740757
Sales			2205200	2205200	2205200
Profits	Sales-variable cost		529020	529020	529020
-Depreciation	Cost of equipment/no. of years		-580252.333	-580252.333	-580252.333
=Pretax cash flows			-51232.3333	-51232.3333	-51232.3333
-taxes	=(Pretax cash flows)*(1-tax)		-34325.6633	-34325.6633	-34325.6633
+Depreciation			580252.3333	580252.3333	580252.3333
= . after tax operating cash flow			545926.67	545926.67	545926.67