Russell\'s of Townville has a proposed project which will generate sales of 4,50
ID: 2648124 • Letter: R
Question
Russell's of Townville has a proposed project which will generate sales of 4,500 units at a selling price of $18 each. The fixed costs are $12,000 and the variable costs per unit are $11. The project requires $48,000 of capital expenditures which will be depreciated on a straight-line basis to a zero book value over the 5-year life of the project. The salvage value of the capital is $6,000 and the tax rate is 35 percent. What is the operating cash flow for year 5?
A. $16,035
B. $16,575
C. $19,935
D. $22,035
E. $22,815
Explanation / Answer
Russell's of Townville has a proposed project which will generate sales of 4,500 units at a selling price of $18 each. The fixed costs are $12,000 and the variable costs per unit are $11. The project requires $48,000 of capital expenditures which will be depreciated on a straight-line basis to a zero book value over the 5-year life of the project. The salvage value of the capital is $6,000 and the tax rate is 35 percent. What is the operating cash flow for year 5?
Operating cash flow for year 5 = ((Selling Price - Variable Cost)*No of Unit Sold - Fixed Cost)*(1-tax rate) + Depreciation * tax rate
Operating cash flow for year 5 = ((18-11)*4500 - 12000)*(1-35%) + 48000/5 * 35%
Operating cash flow for year 5 = $ 16035
Answer
A. $16,035
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