Question

Marie's Fashions is considering a project that will require $39,000 in net working capital and $68,000 in fixed assets. The project is expected to produce annual sales of $78,500 with associated cash costs of $41,000. The project has a four-year life. The company uses straight-line depreciation to a zero book value over the life of the project. Ignore bonus depreciation. The tax rate is 25 percent. What is the operating cash flow for this project

Answer 1

Answer:

$32,375

Explanation:

The operating cash flow is shown below:

= EBIT  + Depreciation - Income tax expense

where,  

EBIT = Sales - costs - depreciation expense

= $78,500 - $41,000 - $17,000

= $20,500

And, the income tax expense would be

= (Sales - costs - depreciation expense) × tax rate

= $20,500 × 25%

= $5,125

The depreciation expense would be

= (Original cost - residual value) ÷ (useful life)

= ($68,000 - $0) ÷ (4 years)

= ($68,000) ÷ (4 years)  

= $17,000

Now put these values to the above formula  

So, the value would equal to

= $20,500 + $17,000 - $5,125

= $32,375