Taylor United is considering overhauling its equipment to meet increased demand for its product. The cost of equipment overhaul is $4.02 million, plus $214,086.00 in installation costs. The firm will straight-line depreciate the equipment to zero using a 5-year recovery period. Additional sales from the overhaul should amount to $239,013.00 per year, and additional operating expenses and other costs (excluding depreciation) will amount to 39.00% of the additional sales. The firm has an ordinary tax rate of 37.00%. What is the operating cash flow for year 1 of this project?

$405,175.06

Explanation:

The computation of the operating cash flow for year 1 is shown below:

Sales           $239,013

Less operating expenses & other cost ($239,013 × 39%) -$93,215.07

Less: Depreciation expenses

($4,020,000 + $214,086) ÷ 5 years                                -$846,817.20

Earning before interest and taxes                                    -$701,019.27

Less: Taxes at 37%                                                              $259,377.13

Net income                                                                          -$441,642.14

Add: depreciation expenses                                              $846,817.20

Operating cash flow                                                           $405,175.06

We simply deduct the operating sales and depreciation expenses from sales so that the EBIT could arrive after that taxes are deducted so that the net income could come and then finally added depreciation expenses so that operating cash flow could come

88 because 4 plus 4 equals 8. 40 plus 40 equals 80. 80 plus 8 equals 88