Question

What is the operating cash flow (OCF) for year 3 of the health club project that Yellow Sand Food should use in its NPV analysis of the project? During year 3, the health club project is expected to have relevant revenue of $784,800, relevant variable costs of $315,300, and relevant depreciation of $84,800. In addition, Yellow Sand Food would have one source of fixed costs associated with the health club project. Yesterday, Yellow Sand Food signed a deal with Blue Eagle Consulting to develop an advertising campaign for use in the health club project. The terms of the deal require Yellow Sand Food to pay $33,000 to Blue Eagle in 3 years from today. The tax rate is 35 percent.

Options:
A. $308,460
B. $381,300
C. $415,600
D. $532,660

Answer 1

The Operating Cash Flow (OCF) calculation for year 3 after accounting for revenues, variable costs, depreciation, fixed costs, and tax rate results in $313,405. However, this result does not match any of the provided options, so there may be a discrepancy in the answer choices or an error in the details provided.

Step-by-step explanation:

To calculate the Operating Cash Flow (OCF) for the third year, you can use the following formula: OCF = (Revenues - Variable Costs - Fixed Costs) * (1 - Tax Rate) + Depreciation * Tax Rate. Considering the provided information, we need to include revenues, variable costs, depreciation, and the tax rate while recognizing that the fixed cost (payment to Blue Eagle Consulting) will occur in year 3, which affects our third-year calculation.

Using the year 3 data provided:

• Revenues: $784,800
• Variable Costs: $315,300
• Depreciation: $84,800
• Fixed Costs: $33,000
• Tax Rate: 35%

Now, we perform the calculation:

OCF = [($784,800 - $315,300 - $33,000) * (1 - 0.35)] + ($84,800 * 0.35)

OCF = [($436,500) * (0.65)] + ($29,680)

OCF = $283,725 + $29,680

OCF = $313,405

However, none of the provided options exactly match this calculation, suggesting there may be a discrepancy in the available answer choices. Always ensure you double-check the calculations and the provided information before finalizing your analysis.