Marie's fashions is considering a project that will require $28,000 in net working capital and $87,000 in fixed assets. the project is expected to produce annual sales of $75,000 with associated cash costs of $57,000. the project has a 5-year life. the company uses straight-line depreciation to a zero book value over the life of the project. the tax rate is 30 percent. what is the operating cash flow for this project? a. -$1,520 b. -$580 c. $420 d. $15,680 e. $17,820

The operating cash flow for this project of Marie’s fashions is letter E. $17,820,

Operating Cash Flow (OCF) measures the amount of cash used by the company in their operating activities.

Solution for the problem:

Operating Cash Flow = ($75,000 - $57,000)(1 - 0.30) + ($87,000/5)(0.30) = $17,820

The answer is: e

Explanation:

Operating cash flow is the cash amount generated from the operating activities of a company. This is normally reported in the cash flow statements of a company under its operating activities. The main components of the operating cash flow is: net income (revenue less cost of sales) plus depreciation less any applicable taxes added to any changes in working capital. In the project under consideration by Marie's fashions, the net working capital appears to be fixed at $28,000, making the changes in working capital equal to zero over the life of the project. Working capital would therefore not be included in the calculation. The rest of the calculation is computed as follows:

Net income: $75,000 - $57000 = $18,000

Applicable tax payable: $18000 * 30% = 54000

Net income after tax: $12, 600

Depreciation: $87000/5 = $17400

Applicable tax deduction: $17400*30%

Tax relief for depreciated asset value: $5220

Total free cash flow = $12600 + $5220

                                 = $17820