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Operating Cash Flow

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A company is considering a new 2 year expansion project which will require an intial fixed asset investment of $6.21 million, the fixed asset will be depreciated straight line to zero over its 2 year tax life after that it will be worthless, this project is estimated to generate $5,520,000 in annual sales, have costs of $2,208,000 and the tax rate is 35% then what is the OCF?

So far i did this *but am not sure about the dep can you please check it over

OCF=(Sales-Costs) x (1+T) + Dep xT
(5,520,000 - 2,208,000) x (1+ .35) +? / .35
3,312,000x1.35x?
and the formula for straight line to o dep= costs of assets - estimated salvage value / assets used for economic life

2,208,000 - 0 / 6,210,000= .355555556 (yet this formula does not look right to me)

the same q with these numbers:
6 year expansion project
initial fixed asset investments of 5.67mill
straight line to 0 depreciation over a 6 year life, after it will be worthless
project is estimated to generate 5,040,000 in annual sales
with costs of 2,016,000
tax rate is 32% , what is the OCF?

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Solution Preview

Depreciation = costs of assets - estimated salvage value / assets used for economic life

Cost of assets = 6210000mn$
Salvage value = o
Economic life = 2 years

Depreciation 3105000

OCF=(Sales-Costs) x (1-T) + ...

Solution Summary

This solution explain how to calculate the perating cash flow of the project with the help of the case study.

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Incremental operating cash flow statements

Mini Case a-c Page 580

a. Set up, without numbers, a time line for the project's cash flows.

b. 1) Construct incremental operating cash flow statements for the project's 4 years of operations.

2) Does your cash flow statement include any financial flows such as interest expense or dividends? Why or why not?

c. 1) Suppose the firm had spent $ 100,000 last year to rehabilitate the production line site. Should this cost be included in the analysis? Explain.

2) Now assume that the plant space could be leased out to another firm at $25,000 a year. Should this be included in the analysis? If so, how?

3) Finally, assume that the new product line is expected to decrease sales of the firm's other lines by $50,000 per year. Should this be considered in the analysis? If so, how?

Please also use the attached spreadsheet!

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