Question

What is the operating cash flow (OCF) for year 3 of the health club project that Silver Sun Shipping should use in its NPV analysis of the project? Silver Sun Shipping operates a(n) laser tag center. The firm is evaluating the health club project, which would involve opening a health club. During year 3, the health club project is expected to have relevant revenue of 722,400 dollars, relevant variable costs of 386,300 dollars, and relevant depreciation of 95,900 dollars. In addition, Silver Sun Shipping would have one source of fixed costs associated with the health club project. Yesterday, Silver Sun Shipping signed a deal with Green Forest Media to develop an advertising campaign for use in the health club project. The terms of the deal require Silver Sun Shipping to pay 38,500 dollars to Green Forest Green Forest in 3 years from today. The tax rate is 25 percent.

Answer 1

Calculation of Net Income as per Accrual Method :-

B C D 1 Particulars 2 Amount Sales 3 722,400 Variable Cost 4 386,300 Fixed Cost for advertising campaign 5 38,500 6 Depreciation 95,900 7 Profit before Taxes 201,700 Taxes @ 25% 50,425 10 Profit After Taxes 151,275 11 12. CO

А C Particulars Amount Sales 722400 Variable Cost 386300 Fixed Cost for advertising campaign 5 38500 95900 6 Depreciation 7 Profit before Taxes C3-SUM(C4:C6) Taxes @ 25% -C8*0.25 10 Profit After Taxes —С8-C9 11 12. st

To compute OCF, we need to add back Depreciation to Profit After Taxes, as Depreciation is a non-cash expenditure.

Hence OCF for year 3= 247,175

	Profit After Taxes	151,275
Add:	Depreciation	95,900
	OCF	247,175