You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?

Question

Quizplus · Accepted Answer

The operating cash flow (OCF) for year 2 can be calculated using the formula: OCF = (Sales - Variable Costs - Fixed Costs - Depreciation) * (1 - Tax Rate) + Depreciation. For year 2: Sales = 7,000 units * $25 = $175,000; Variable Costs = 7,000 units * $10 = $70,000; Fixed Costs = $50,000; Depreciation = $10,000 / 3 = $3,333.33. OCF = ($175,000 - $70,000 - $50,000 - $3,333.33) * (1 - 0.34) + $3,333.33 = $37,433.33.

You Are Evaluating a Project for Your Company