BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per unit sold is $10. Fixed costs are $30,000 per year.

Using the BASIC INFORMATION only, if you expect to sell 7,000 units per year, what is the OCF in year 2 assuming a required return of 15% and a tax rate of 30%?
A) $17,000
B) $20,000
C) $34,000
D) $48,000
E) $55,000

Question

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per unit sold is $10. Fixed costs are $30,000 per year.

Using the BASIC INFORMATION only, if you expect to sell 7,000 units per year, what is the OCF in year 2 assuming a required return of 15% and a tax rate of 30%?
A) $17,000
B) $20,000
C) $34,000
D) $48,000
E) $55,000

Quizplus · Accepted Answer

The Operating Cash Flow (OCF) can be calculated using the formula: OCF = (Sales - Costs - Depreciation) * (1 - Tax Rate) + Depreciation. Sales = 7,000 units * $20/unit = $140,000. Costs = 7,000 units * $10/unit + $30,000 fixed costs = $100,000. Depreciation = $60,000 / 3 years = $20,000. Thus, OCF = ($140,000 - $100,000 - $20,000) * (1 - 0.30) + $20,000 = $34,000.

BASIC INFORMATION: a Three-Year Project Will Cost $60,000 to Construct