Summer Tyme, Inc., is considering a new 5-year expansion project that requires a

Question

Summer Tyme, Inc., is considering a new 5-year expansion project that requires an initial fixed asset investment of $3.888 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless. The project is estimated to generate $3,456,000 in annual sales, with costs of $1,382,400.

If the tax rate is 33 percent, what is the OCF for this project?

PLEASE SHOW ALL WORK.

(The only possible answers are: $1,728,216 or $1,645,920 or $2,073,600 or $868,320 or $1,563,624)

Explanation / Answer

1,645,920.00

0 1 2 3 4 5 Initial cost                  (3,888,000.00) Revenue 3456000 3456000 3456000 3456000 3456000 Variable cost 1382400 1382400 1382400 1382400 1382400 Depreciation 20.00% 20.00% 20.00% 20.00% 20.00% Depreciation      (777,600.00)    (777,600.00)    (777,600.00)    (777,600.00)    (777,600.00) Net income 868320 868320 868320 868320 868320 ocf                  (3,888,000.00)    1,645,920.00 1,645,920.00 1,645,920.00 1,645,920.00 1,645,920.00

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