Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,200,000. 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 $2,290,000 in annual sales, with costs of $1,310,000. If the tax rate is 21 percent, what is the OCF for this project?

Answer 1

Answer 2

To calculate the Operating Cash Flow (OCF) for the project, we need to follow these steps:

Step 1: Calculate the annual depreciation expense. Step 2: Calculate the annual earnings before taxes (EBT). Step 3: Calculate the taxes paid. Step 4: Calculate the OCF.

Let's go through each step:

Step 1: Calculate the annual depreciation expense:The fixed asset will be depreciated straight-line to zero over its three-year tax life, so the annual depreciation expense is the initial fixed asset investment divided by the tax life (in this case, 3 years).

Annual Depreciation Expense = Initial Fixed Asset Investment / Tax Life Annual Depreciation Expense = $2,200,000 / 3 Annual Depreciation Expense = $733,333.33

Step 2: Calculate the annual earnings before taxes (EBT):The Earnings Before Taxes (EBT) is the difference between the annual sales and costs, minus the annual depreciation expense.

EBT = Annual Sales - Annual Costs - Annual Depreciation Expense EBT = $2,290,000 - $1,310,000 - $733,333.33 EBT = $246,666.67

Step 3: Calculate the taxes paid:Taxes are calculated based on the EBT and the tax rate, which is 21 percent.

Taxes = EBT * Tax Rate Taxes = $246,666.67 * 0.21 Taxes = $51,800

Step 4: Calculate the OCF:Operating Cash Flow (OCF) is the earnings before taxes minus the taxes paid.

OCF = EBT - Taxes OCF = $246,666.67 - $51,800 OCF = $194,866.67

The Operating Cash Flow (OCF) for this project is $194,866.67.

Answer 3

To calculate the Operating Cash Flow (OCF) for the project, we need to consider the following components:

1. Sales Revenue (S): $2,290,000

2. Cost of Goods Sold (COGS): $1,310,000

3. Depreciation (Dep): This is the depreciation expense for the fixed asset, which is calculated using the straight-line depreciation method.

4. Tax Rate (T): 21%

First, let's calculate the annual depreciation expense:

Depreciation (Dep) = Initial Fixed Asset Investment / Tax Life Depreciation (Dep) = $2,200,000 / 3 = $733,333.33 per year

Next, we can calculate the Earnings Before Taxes (EBT) for each year:

EBT = Sales Revenue - COGS - Depreciation EBT = $2,290,000 - $1,310,000 - $733,333.33 EBT = $246,666.67

Now, we can calculate the taxes for each year using the given tax rate:

Taxes = EBT * Tax Rate Taxes = $246,666.67 * 0.21 Taxes = $51,800

Finally, we can calculate the Operating Cash Flow (OCF) for each year:

OCF = EBT - Taxes + Depreciation OCF = $246,666.67 - $51,800 + $733,333.33 OCF = $928,200

The OCF for each year of the three-year project will be $928,200.