Marie's Fashions is considering a project that will require $39,000 in net working capital and $68,000 in fixed assets. The project is expected to produce annual sales of $78,500 with associated cash costs of $41,000. The project has a four-year life. The company uses straight-line depreciation to a zero book value over the life of the project. Ignore bonus depreciation. The tax rate is 25 percent. What is the operating cash flow for this project?
A) $33,325
B) $27,580
C) $32,545
D) $25,760
E) $32,375

Question

Quizplus · Accepted Answer

Operating cash flow (OCF) is calculated as: OCF = (Sales - Costs) * (1 - Tax rate) + Depreciation * Tax rate. Depreciation = $68,000 / 4 = $17,000. OCF = ($78,500 - $41,000) * (1 - 0.25) + $17,000 * 0.25 = $32,375.

Marie's Fashions Is Considering a Project That Will Require $39,000