Keiper, Inc., is considering a new three-year expansion project that requires an

Question

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 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 $2,030,000 in annual sales, with costs of $725,000. If the tax rate is 35 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 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 $2,030,000 in annual sales, with costs of $725,000. If the tax rate is 35 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Explanation / Answer

OCF = EBIT * (1-T) + Depreciation

Depreciation = 2550000/3 = $850000

EBIT = Revenue - COGS - Depreciation = 2030000 - 725000 - 850000 = $455000

OCF = 455000*(1-0.35) + 850000 = $1145750

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