As per the question 13 and answer. Take question and answer of 13 as reference.

Need Help with question no 14.

13. Calculating Project OCF (L03) Hubrey Home Inc. is considering a newthreeyear expansion project that requires an initial xed asset investment of $3.9 million. The xed asset falls into Class 10 for tax purposes (CCA rate of 30% per year). and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,650,000 in annual sales, with costs of $840,000. If the tax rate is 35%, what is the OCF for each year of this project? Page 3??

13. Calculation of Operating Cash Flow (OCF)

Operating Cash Flow is given as:

OCF = Operating Income after Tax + Depreciation ................................ (Pt. No. 1)

where,

Operating Income After Tax = (Sales - Costs - Depreciation) * (1 - Tax Rate)

NOTE: Annual sales & costs have been given in the question, but we have to calculate annual depreciation.

Calculation of Depreciation:

Initial Fixed Asset Investment = $ 3.9 Mn .......................... (Given in the question)

It is given that the fixed asset is a Class 10 category asset which will attract CCA of 30%. CCA is Capital Cost Allowance, which is similar to depreciation. It is worth noting that CCA is prevelant in Canada and is calculated on the depreciated value of the fixed asset. Canadian laws permit only half of the applicable CCA to be claimed in the first year. For further years, full CCA calculated on the depreciated value of the fixed asset can be claimed.

So,

CCA or Depreciation Year-wise will be as follows:

Year 1 = (30/2)% of 3.9 Million = 0.15 * 3900000 = $585000

Year 2 = 30% of depreciated value of asset = 0.3 * (3900000 - 585000) = $994500

Year 3 = 30% of depreciated value of asset = 0.3 * (3900000 - 585000 - 994500) = $696150

We will use these values of CCA/Depreciation in the calculation of Operating Cash Flow for each year.

Sales, Costs, & Tax Rate have been given in the question for each year:

Sales = $2650000

Costs = $840000

Tax Rate = 35% = 0.35

So,

Operating Cash Flow for Year 1:

OCF Year 1 = Operating Income After Tax + Dep = (Sales - Costs - Depreciation) * (1 - Tax Rate) + Depreciation

= (2650000 - 840000 - 585000) * (1- 0.35) + 585000

= $1381250

Similarly,

OCF Year 2 = (2650000 - 840000 - 994500) * (1- 0.35) + 994500 = $1524575

OCF Year 3 = (2650000 - 840000 - 696150) * (1- 0.35) + 696150 = $1420153

l4. Calculating Project NPV {102} In the previous problem, supposed the required return on the project is 12%. What is the project's NW?