Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The project belongs in a 50% CCA class, and the tax rate is 35%. What is the operating cash flow in the first year for this project?

Question

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To calculate the operating cash flow (OCF) for the first year, we use the formula: OCF = (Sales - Costs)(1 - Tax Rate) + (Depreciation * Tax Rate).First, calculate the net income before taxes:Sales = $110,000Costs = $70,000Net Income before Taxes = Sales - Costs = $110,000 - $70,000 = $40,000Next, calculate the depreciation expense. Since the project requires $80,000 in fixed assets and belongs to a 50% CCA class, the depreciation for the first year is:Depreciation = $80,000 * 50% = $40,000Now, calculate the taxable income:Taxable Income = Net Income before Taxes - Depreciation = $40,000 - $40,000 = $0Since the taxable income is $0, the tax payment is also $0. However, the depreciation still provides a tax shield, which is calculated as:Depreciation Tax Shield = Depreciation * Tax Rate = $40,000 * 35% = $14,000Finally, calculate the operating cash flow:OCF = (Net Income before Taxes)(1 - Tax Rate) + Depreciation Tax ShieldOCF = ($40,000)(1 - 0.35) + $14,000OCF = $26,000 + $14,000 = $40,000Therefore, the correct answer is E) $40,000.

Kurt's Kabinets Is Looking at a Project That Will Require