no more questions ating Project OCF LO1 Summer Tyme Inc is c

no more questions ating Project OCF [LO1] Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.782 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $1,584,000 in annual sales, with costs of $633,600. Required: If the tax rate is 31 percent, what is the OCF for this project? O $245,916 O $839,916 O $881.912 O $950,400o $797,920

Solution

Summer Tyme, Inc. Using the tax shield approach to calculating OCF we get : OCF = (Sales Costs)(1 t C ) + t C Depreciation OCF = ($1,584,000 633,600)(1 .31) + .31($1,782,000/3) OCF = $ 839916