Summer Tyme Inc is considering a new 6year expansion project

Summer Tyme, Inc., is considering a new 6-year expansion project that requires an initial fixed asset investment of $1.080 million. The fixed asset will be depreciated straight-line to zero over its 6-year tax life, after which time it will be worthless. The project is estimated to generate $960,000 in annual sales, with costs of $384,000. If the tax rate is 33 percent, what is the OCF for this project?

A.445,320

B.423,054

C.576,000

D.467,586

E.265,320

Solution

OCF can be calculated using tax shield

OCF= (sales - costs) (1-t_c)+t_cdepreciation

= ($960,000-$384,000)(1-0.33)+(0.33(1,080,000/6)

= 445,320

The correct answer is A. 445,320