ABC, Inc is planning the purchase of new equipment that costs $135536. The proje

Question

ABC, Inc is planning the purchase of new equipment that costs $135536. The project is expected to last for 14 years. Each year, the new project is expected to sell 183 units for $398 per unit. The variable costs are expected to $81 per unit and the fixed costs are expected to be $20390. The equipment will be depreciated on a straight-line basis over the 14-year life of the project. That is, the depreciation each year will be $135536/14. Assuming a tax rate of 35%, what is the operating cash flow?

Explanation / Answer

Operating Cash Flow = (Sales - Total Operating Costs - Depreciation) * (1 - T) + Depreciation ......(Eq 1)

Sales = Number of units * Price per unit = 183 * 398 = $72,834

Total Operating Costs = Fixed Costs + Variable Cost per unit * Number of units

Total Operating Costs = 20,390 + 81 * 183 = $35,213

Depreciation = 135,536/14 = $9,681.14

Tax rate = 35%

Recall Eq 1:

Operating Cash Flow = (Sales - Total Operating Costs - Depreciation) * (1 - T) + Depreciation

Operating cash flow = (72,834 - 35,213 - 9,681.14) * (1 - 0.35) + 9,681.14

Operating cash flow = $27,842.05

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