An expansion projection requires $500,000 of upfront capital costs to purchase a

Question

An expansion projection requires $500,000 of upfront capital costs to purchase and install new machinery. The machinery will be depreciated straight-line to zero over a 5 year life. The new project is expected to increase sales by $320,000 per year for the next five years. Variable costs are expected to be $160,000 per year and fixed costs are expected to be $70,000 per year. The appropriate tax rate is 30%. What is the amount of the change in the firm's operating cash flow per year resulting from this project?

Explanation / Answer

Sales $              320,000 Less: Costs $              230,000 160000+70000 Dereciation $              100,000 500000/5 EBIT $              (10,000) Less: Tax @30% $                (3,000) Net income $                (7,000) Add: Depreciation $              100,000 Operating cash flows (OCF) $                93,000

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