Fairfax Pizza is evaluating a project that would require an initial investment i

Question

Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 200,000 dollars and that is expected to last for 9 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 41 percent, 31 percent, 19 percent, and 9 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 346,000 dollars and relevant, incremental annual costs associated with the project to be 302,000 dollars. The tax rate is 50 percent. What is (X plus Y) if X is the relevant operating cash flow (OCF) associated with the project expected in year 1 of the project and Y is the relevant OCF associated with the project expected in year 4 of the project?

Explanation / Answer

Year 1 Revenue 346000 Cost 302000 Depreciation 82000 Loss -38000 Tax@ 50% 19000 Loss After Tax -19000 Add Back Depreciation 82000 OCF 63000 Year 4 Revenue 346000 Cost 302000 Depreciation 18000 Profit 26000 Tax@ 50% 13000 Profit After Tax 13000 Add Back Depreciation 18000 OCF 31000 Year 9 years Rates Depreciation 1 200000 41 82000 2 200000 31 62000 3 200000 19 38000 4 200000 9 18000

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