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# Operating cash flow - Datum's project

The Datum Co. has recently completed a \$200,000, two-year marketing study. Based on the results of the study, Datum has estimated that 6,000 units of its new electro-optical data scanner could be sold annually over the next 8 years, at a price of \$8,000 each. Variable costs per unit are \$4,400, and fixed costs total \$5.4 million per year.

Start-up costs include \$17.6 million to build production facilities, \$1.5 million for land, and \$4 million in net working capital. The \$17.6 million facility will be depreciated on a straight-line basis to a value of zero over the eight-year life of the project. At the end of the project's life, the facilities (including the land) will be sold for an estimated \$4.7 million. The value of the land is not expected to change during the eight year period.
Finally, start-up would also entail tax-deductible expenses of \$0.4 million at year zero. Datum is an ongoing, profitable business and pays taxes at a 35% rate on all income and capital gains. Datum has a 20% opportunity cost for projects such as this one.

What operating cash flow does Datum's project generate each year during its life?

Continuing the previous problem, what is the initial cash flow at year 0?

#### Solution Preview

What operating cash flow does Datum's project generate each year during its life?

Gross profit = (Price -unit Variable Cost)*sales - fixed cost= (8000 - 4400 )*6000 - ...

#### Solution Summary

This solution explains Datum's cash flows, addressing gross profit or annual depreciation

\$2.19