Quad Enterprises is considering a new threeyear expansion pr

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,140,000 in annual sales, with costs of $835,000. If the tax rate is 35 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

Solution

Initial Investment = $2,880,000
Useful Life = 3 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $2,880,000 / 3
Annual Depreciation = $960,000

Annual Sales = $2,140,000
Annual Cost = $835,000
Tax Rate = 35%

OCF = (Annual Sales - Annual Cost) * (1 - tax) + tax * Annual Depreciation
OCF = ($2,140,000 - $835,000) * (1 - 0.35) + 0.35 * $960,000
OCF = $1,184,250

So, OCF for this project is $1,184,250