Wonder Shampoo, Inc. is considering launching a new shampoo product in the comin

Question

Wonder Shampoo, Inc. is considering launching a new shampoo product in the coming year. The new shampoo project requires $5.7 million capital investments at time zero, which will be depreciated based on the 3-year MACRS shown below. This project is expected to generate new sales of $6 million each year with $3 million cost a year. What is the operating cash flow for year 1 if the firm's tax rate is 40%? 3-Year MACRS Year Percentage 1 33% 2 45% 3 15% 4 7% total 100%

1) $2.552 million. 2) $3.369 million. 3) $2.042 million. 4) $1.94 million.

Explanation / Answer

Sales $            6.000 Less: Costs $            3.000 Dereciation $            1.881 5.7*0.33 EBIT $            1.119 Less: Tax @40% $            0.448 Net income $            0.671 Add: Depreciation $            1.881 Operating cash flows for year (OCF) $            2.552

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