The sports club wants to expand his facility. The expansion will require $438,00

Question

The sports club wants to expand his facility. The expansion will require $438,000 in building improvements that will be depreciated on a straight line basis over a 20 year period. The expanded area is expected to generate $203,000 in additional sales. Variable costs are 60% of sales and the annual fixed cost are $13,600. The tax rate is 34%. What is the operating cash flow for the first year of this project? The sports club wants to expand his facility. The expansion will require $438,000 in building improvements that will be depreciated on a straight line basis over a 20 year period. The expanded area is expected to generate $203,000 in additional sales. Variable costs are 60% of sales and the annual fixed cost are $13,600. The tax rate is 34%. What is the operating cash flow for the first year of this project?

Explanation / Answer

calculation of operating cash flow for the first year

expected to genarate addittional sales = $ 203,000

variable cost = 60%

fixed cost is irrelavent cost

profit = 203,000*(1-0.6)

= 81,200

net profit after tax = 81,200(1-0.34)

= $ 53,592

depreciation = 438,000/20 =$ 21,900

tax savings on depreciation = 21900*34%= $ 7,446

toatl cash flow = $ 53,592+$ 7,446

= $ 61,038.

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