Phone Home, Inc. is considering a new five-year expansion project that requires an initial fixed asset investment of $6.089 million. The fixed asset will be depreciated straight-line to zero over the project's life, after which time it will be worthless. No bonus depreciation will be taken. The project is estimated to generate $4,389,000 in annual sales, with costs of $1,731,200. The tax rate is 24 percent. What is the annual operating cash flow for this project?

Question

Quizplus · Accepted Answer

The annual operating cash flow is calculated as: OCF = (Sales - Costs - Depreciation) * (1 - Tax Rate) + Depreciation. Depreciation = $6,089,000 / 5 = $1,217,800. OCF = ($4,389,000 - $1,731,200 - $1,217,800) * (1 - 0.24) + $1,217,800 = $2,312,200.