The operating cash flow of the project in year 2 is $16,400. The Option D is correct.
Depreciation Expense = (Initial Capital Expenditure) / (Project Life)
= ($40,000) / (5 years)
= $8,000 per year
The Earnings Before Tax (EBT) in year 2 is
= (Sales Increase) - (Cash Expenses Increase) - Depreciation Expense
= $41,000 - $21,000 - $8,000
= $12,000
Taxes = EBT * Tax Rate
= $12,000 * 30%
= $3,600
Operating Income After Taxes = EBT - Taxes
= $12,000 - $3,600
= $8,400
Operating Cash Flow = Operating Income After Taxes + Depreciation Expense
= $8,400 + $8,000
= $16,400.
Full question:
A proposed expansion project is expected to increase sales of Refresh Inc. by $41,000 and increase cash expenses by $21,000. The project will cost $40,000 in capital expenditure and be depreciated using straight-line depreciation to a zero book value over the 5-year life of the project. The store has a marginal tax rate of 30 percent. What is the operating cash flow of the project in year 2? Select the choice that is closest to your answer. Group of answer choices
$16,100
$8,400
$7,800
$16,400