1. The ABC Ltd is a clothing manufacturing company which is considering the purchase of an automated sewing machine that will cost Tshs 200 million and is expected to operate for five years, after which time it is not expected to have any value. The investment is expected to generate Tshs 360 million in additional revenues for the firm during each of the five years of the project’s life. 
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3. Due to the expanded sales, ABC Ltd expects to have to expand its investment in accounts receivable by Tshs 60 million and inventories by Tshs 36 million. These investments in working capital will be partially offset by an increase in the firm’s accounts payable of Tshs 18 million, which makes the increase in net operating working capital equal to Tshs 78 million in year zero. 
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5. Note that this investment will be returned at the end of year five as inventories are sold, receivables are collected, and payables are repaid. The project will also result in cost of goods sold equal to 60% of revenues while incurring other annual cash operating expenses of Tshs 5 million per year. In addition, the depreciation expense for the machine is Tshs 40 million per year. This depreciation expense is one-fifth of the initial investment of Tshs 200 million where the estimated salvage value is zero at the end of its five-year life. Profits from the investment will be taxed at a 30% tax rate and the firm uses a 20% required rate of return.
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7. Required
   Calculate the operating cash flow for the project.

Answer rating: 100% (QA)

To calculate the operating cash flow for the project we need to consider the additional revenues cos... View the full answer