Jeff T. answered • 07/05/19

My MBA Tutor from GMAT to Graduation

First let's calculate depreciation expense because we'll need that to compute the last year's operating cash flow. Straight line depreciation equals (historical cost - estimated salvage value) / useful life. In this case, it is (55,624 - 0) / 5 = 11,124.80 per year.

Next let's calculate earnings before interest and taxes (EBIT).

EBIT = Revenue - Expenses (including depreciation)

EBIT = 96,772 - 50,601 - 11,136 - 11,124.8

EBIT = 23,910.20

Now let's calculate net operating profit after tax (NOPAT)

NOPAT = EBIT * (1-tax rate)

NOPAT = 23,910.20 * (1-.38)

NOPAT = 14,824.32

Now let's calculate Operating Cash Flow (OCF)

OCF = NOPAT + Depreciation

OCF = 14,824.32 + 11,124.80

OCF = 25,949.12

This is the annual project cash flow. However, in the last year it turns out you can sell the finishing lathe. So we need to include an after tax salvage value.

After tax salvage value = Salvage - (Salvage - Book Value) * Tax Rate

Note that we depreciated the equipment to 0 so the Book Value = 0

After tax salvage value = 9,839 - (9,839 - 0)*.38

After tax salvage value = 6,100.18

So the project cash flow in the last year is 25,949.12 + 6,100.18 = $32,049.30

Hope that helped!