Question

esfandairi enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.38 million. the fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. the project is estimated to generate $1,678,000 in annual sales, with costs of $647,000. if the tax rate is 22 percent, what is the ocf for this project? (do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1

The OCF for this project is $1,597,913.33.

Step-by-step explanation:

To calculate the OCF for this project, we need to consider the annual sales, costs, and depreciation of the fixed asset. Here are the steps:

• Calculate the annual depreciation of the fixed asset by dividing the initial fixed asset investment by the tax life of three years. In this case, the annual depreciation is $2.38 million / 3 = $793,333.33.
• Calculate the annual profit before tax by subtracting the costs from the sales. In this case, the profit before tax is $1,678,000 - $647,000 = $1,031,000.
• Calculate the tax expense by multiplying the profit before tax by the tax rate. In this case, the tax expense is $1,031,000 * 0.22 = $226,420.
• Finally, calculate the OCF by subtracting the tax expense and adding back the annual depreciation to the profit before tax. In this case, the OCF is $1,031,000 - $226,420 + $793,333.33 = $1,597,913.33.