Question

A company is considering the purchase of a $200,000 computer-based inventory management system. It will be depreciated straight-line to zero over its four-year life. It will be worth $30,000 at the end of that time. The system will save $60,000 before taxes in inventory-related costs. The relevant tax rate is 39%. The new setup is more efficient than the earlier one, as less total inventory is kept on hold, thereby freeing $45,000 in net working capital. Find the OCF.

A) $93,400
B) $102,600
C) $123,000
D) $134,200

Answer 1

The Operating Cash Flow (OCF) for the purchase of the computer-based inventory management system is $93,400.

Step-by-step explanation:

To find the Operating Cash Flow (OCF), we need to calculate the cash inflows and outflows associated with the purchase of the computer-based inventory management system. The cash inflows include the savings in inventory-related costs, which is $60,000. The cash outflow is the purchase cost of the system, which is $200,000.

We also need to take into account the tax implications. The relevant tax rate is 39%, so we need to calculate the after-tax cash flow. The after-tax cash flow is the pre-tax cash flow multiplied by (1 - tax rate).

Finally, we can calculate the OCF by subtracting the after-tax cash flow from the net working capital freed by the more efficient setup, which is $45,000. The OCF is $93,400.