A project will require $512,000 for fixed assets and $47,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the six-year life of the project. No bonus depreciation will be taken. At the end of the project, the fixed assets will be worthless. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and the required rate of return is 14.7 percent. What is the amount of the annual operating cash flow?
A) $283,633.33
B) $447,826.67
C) $378,950.00
D) $245,300.00
E) $198,300.00

Question

Quizplus · Accepted Answer

The annual operating cash flow can be calculated using the formula: OCF = (Sales - Costs - Depreciation) * (1 - Tax Rate) + Depreciation. Here, Depreciation = $512,000 / 6 = $85,333.33. So, OCF = ($965,000 - $508,000 - $85,333.33) * (1 - 0.21) + $85,333.33 = $378,950.00.

A Project Will Require $512,000 for Fixed Assets and $47,000