Question

King Nothing is evaluating a new 6-year project that wili have annual soles of $277,000 and costs of $184,000. The project will require fixed assets of $93,000, which will be depreciated on a 5 -year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 6 percent. What is the operating cash flow for Year 3?

Answer 1

The operating cash flow for Year 3 can be calculated by adjusting the net income to add back the non-cash expense of depreciation, resulting in an OCF of $88,491.36 for that year.

Step-by-step explanation:

To calculate the operating cash flow (OCF) for Year 3 of the project mentioned, we start by determining the project's net income for that year. First, we calculate the depreciation for Year 3 using the provided MACRS percentages, then we compute the taxable income by deducting this depreciation and the project's costs from its annual sales. Finally, we adjust for taxes and add back the depreciation to find the OCF since depreciation is a non-cash expense.

For Year 3, we multiply the fixed asset value of $93,000 by the Year 3 MACRS percentage of 19.20 percent, which gives us a depreciation of $17,856. The project's sales for the year are $277,000, and costs are $184,000. Subtracting costs and depreciation from sales yields a taxable income of $75,144. The tax is then calculated at 6 percent, which is $4,508.64. Subtracting tax from the taxable income gives a net income of $70,635.36. The depreciation is then added back to the net income to get the OCF, resulting in an OCF of $88,491.36 for Year 3.

Note: Calculations are based on the data provided in the question and may require additional information or adjustments based on real-world factors such as working capital changes or salvage value considerations at the end of the project's life.