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Wilson, Inc., is considering a new four-year expansion project that requires an initial fixed asset investment...

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Finance

Wilson, Inc., is considering a new four-year expansion projectthat requires an initial fixed asset investment of $1,950,000. Thefixed asset will be depreciated straight-line to zero over itsfour-year tax life, after which time it will be worthless. Theproject is estimated to generate $2,145,000 in annual sales, withcosts of $1,205,000. If the tax rate is 35%, what is the OperatingCash Flow (OCF) for this project ?

1.

$327,430.28

2.

$374,921.15

3.

$2,277,430.38

4.

$2,324.921.15

5.

$781,625.00

Answer & Explanation Solved by verified expert
3.6 Ratings (355 Votes)

5. $781,625.00

Working:

Calculation of operating cash flow:
Sales $   21,45,000.00
Cost of sales      -12,05,000.00
Depreciation Expense        -4,87,500.00
Profit Before Tax          4,52,500.00
Tax Expense        -1,58,375.00
Net Income          2,94,125.00
Depreciation Expense          4,87,500.00
Operating Cash flow $     7,81,625.00
Working:
Straight line depreciation = Cost of Building / Useful Life of project
= 1950000/4
=                4,87,500
Tax Expense = Profit before tax * Tax Expense
=                4,52,500 * 35%
=                1,58,375

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Transcribed Image Text

Wilson, Inc., is considering a new four-year expansion projectthat requires an initial fixed asset investment of $1,950,000. Thefixed asset will be depreciated straight-line to zero over itsfour-year tax life, after which time it will be worthless. Theproject is estimated to generate $2,145,000 in annual sales, withcosts of $1,205,000. If the tax rate is 35%, what is the OperatingCash Flow (OCF) for this project ?1.$327,430.282.$374,921.153.$2,277,430.384.$2,324.921.155.$781,625.00

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