Final answer:
The Operating Cash Flow (OCF) for Evong Homes Inc.'s new project is calculated using the formula OCF = (Sales - Costs) * (1 - Tax Rate) + Depreciation * Tax Rate. With provided figures, the annual OCF is calculated to be $949,500 over the three-year period, assuming straight-line depreciation.
Step-by-step explanation:
The question asks us to calculate the Operating Cash Flow (OCF) for Evong Homes Inc.'s new project. Initially, we need to consider the project's revenue, costs, and the impact of depreciation from the capital cost allowance (CCA) system, based on the Class 8 asset classification that has a CCA rate of 20%. Depreciation is a non-cash expense that affects taxable income and accordingly, tax savings need to be accounted for as well.
To calculate OCF, we use the formula: OCF = (Sales - Costs) * (1 - Tax Rate) + Depreciation * Tax Rate. Based on the given information, annual sales are $1,730,000, and annual costs are $764,000. With a tax rate of 25%, we compute the OCF as follows: OCF = ($1,730,000 - $764,000) * (1 - 0.25) + (Depreciation * 0.25).
Since the question does not provide the actual annual depreciation, we assume straight-line depreciation over the project's life (3 years) which would be amounts to $2,700,000/3 = $900,000 per year. Therefore, the OCF calculation becomes: OCF = ($1,730,000 - $764,000) * (1 - 0.25) + ($900,000 * 0.25).
Finally, the OCF for Evong Homes Inc. project would be:
- OCF = ($966,000) * (0.75) + ($225,000)
- OCF = $724,500 + $225,000
- OCF = $949,500
This calculation reflects the annual operating cash flow the project is expected to generate over the three-year period.