Emma's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce annual sales of $110,000 with associated costs (other than depreciation) of $70,000. Kurt’s pay $5,000 a year as interest on its debt. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the annual operating cash flow for this project?
33,000
To calculate the annual operating cash flow for this project, we need to consider the following components:
1. Sales: The project is expected to produce annual sales of $110,000.
2. Costs: The associated costs (other than depreciation) are given as $70,000.
3. Depreciation: Since the company uses straight-line depreciation to a zero book value over the life of the project, we can calculate the depreciation expense using the fixed assets. The fixed assets for this project are $80,000. To determine the annual depreciation expense, we divide the total fixed assets by the project's life, which is 4 years. So, the annual depreciation expense is $80,000 / 4 = $20,000.
4. Interest expense: Kurt's pay $5,000 a year as interest on its debt.
5. Tax rate: The tax rate is given as 35%.
Now, let's calculate the annual operating cash flow:
Operating Cash Flow = Sales - Costs - Depreciation + Interest expense - Taxes
Operating Cash Flow = $110,000 - $70,000 - $20,000 + $5,000 - (Tax rate * Net Income)
Net Income = Sales - Costs - Depreciation - Interest expense
Net Income = $110,000 - $70,000 - $20,000 - $5,000 = $15,000
Tax = Tax rate * Net Income = 0.35 * $15,000 = $5,250
Operating Cash Flow = $110,000 - $70,000 - $20,000 + $5,000 - $5,250 = $20,750
Therefore, the annual operating cash flow for this project is $20,750.