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 $5.940 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 $5,280,000 in annual sales, with costs of $2,112,000. If the tax rate is 34 percent, what is the OCF for this project?

Solution

Computation of OCF :

Annual sales $52,80,000

Less: Cost ($21,12,000)

Cash flow before tax and depreciation $31,68,000

Less:Depreciation($5.940 million / 4) ($14,85,000)

Cash flow before tax $16,83,000

Less: Tax@34% ($5,72,220)

Cash flow after tax $11,10,780

Add: Depreciation $14,85,000

Operating cash flow (OCF) $ 25,95,780