A company is considering a new four-year expansion project that requires an initial asset investment of $2.0 million. The fixed assets will be depreciated on a straight-line basis and its estimated salvage value four years from now is $400,000. The project also requires an initial investment in net working capital of $250,000. The project is estimated to increase next income before taxes and depreciation by $1.2 million per year. The firms tax rate is 40% and the cost of capital is 12% What is the annual operating cash flow of the project during its four-year life?
Added by Immy B.
Step 1
The initial asset investment is $2.0 million and the salvage value after four years is $400,000. So, the total depreciation over four years is $2.0 million - $400,000 = $1.6 million. As the depreciation is on a straight-line basis, the annual depreciation is $1.6 Show more…
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Quad Enterprises is considering a new 4-year expansion project that requires an initial fixed asset investment of $2.646 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $2,352,000 in annual sales, with costs of $940,800. If the tax rate is 25 percent, what is the OCF for this project? A. $1,162,586 B. $562,275 C. $1,223,775 D. $1,411,200 E. $1,284,964
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