16.) A company is considering a 5-year project to open a new product line. A new

Question

16.)

A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $70,000 would be required to manufacture their new product, which is estimated to produce sales of $90,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 56% of sales, and the tax rate at this firm is 38%. If straight-line depreciation is used to calculate annual depreciation, what is the estimated annual operating cash flow from this project each year? (Answer to the nearest dollar.)

Explanation / Answer

Sales $         90,000 Less: Costs $         50,400 90000*56% Depreciation $         14,000 70000/5 EBIT $         25,600 Less: Tax payable @ 38% $           9,728 Net income $         15,872 Add: Depreciation $         14,000 Operating cash flows for year (OCF) $    29,872

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