Summer Tyme, Inc., is considering a new 4-year expansion project that requires a

Question

Summer Tyme, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $2.700 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $2,400,000 in annual sales, with costs of $960,000. If the tax rate is 32 percent, what is the OCF for this project?
Summer Tyme, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $2.700 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $2,400,000 in annual sales, with costs of $960,000.

Explanation / Answer

Depreciaton=(2.7/4)=$675000/year

Hence OCF=(Sales-Costs)(1-tax rate)+(Tax savings on depreciation)

=(2,400,000-960,000)(1-0.32)+(0.32*675000)

=$1,195,200

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