Summer Tyme Inc is considering a new 4year expansion project

Summer Tyme, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $4.644 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $4,128,000 in annual sales, with costs of $1,651,200. Required: If the tax rate is 32 percent, what is the OCF for this project?

Solution

Particulars   Amount Per Year

Annual Sales $4,128,000

Less Costs $1,651,200

Less Depreciation $1,161,000 ( $ 4.644 Million / 4 years = $ 1,161,000 per year ) ____________ Gross Income $1,315,800

Less Taxation @ 32 % $ 421,056 ___________ Net Income $ 894,744

Add Depreciation $1,161,000 ____________ Operating Cash Flows $ 2,055,744 per Year

Operating Cash Flows for Total Project = $ 2,055,744 X 4 years = $ 8,222,976