Question

Dog Up! Is looking at a new hot dog system, with an installed cost of $290,000. This will be depreciated over a 5 year life at which time the system can be scrapped for $60,000. The system will save the company $120,000 per year in pretax operating costs, and there is an intial working capital investment of $28,000. Tax rate is 34% and the firms discount rate is 10%. What is the annual OCF? answer without using Excel

Answer 1

The annual OCF (Operating Cash Flow) can be calculated by subtracting the depreciation expense from the pretax operating cost savings and then multiplying by (1 - Tax Rate). Given the values in the question, the annual OCF is $48,840.

Step-by-step explanation:

To calculate the annual OCF (Operating Cash Flow), we need to consider the cash flows associated with the investment. The annual OCF can be calculated as follows:

Annual OCF = (Pretax Operating Cost Savings - Depreciation Expense) x (1 - Tax Rate)

Given that the system will save the company $120,000 per year in pretax operating costs and will be depreciated over a 5-year life, we can substitute the values in the formula as follows:

Annual OCF = ($120,000 - ($290,000 - $60,000) / 5) x (1 - 0.34)

Simplifying the equation gives us:

Annual OCF = ($120,000 - $46,000) x 0.66

Annual OCF = $74,000 x 0.66

Annual OCF = $48,840