pink mining is evaluating a 4 - year project that would require an initial investment in equipment of…

pink mining is evaluating a 4 - year project that would require an initial investment in equipment of $460,000. accelerated depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 would be 40%, 35%, 15%, and 10%. in year 1, the project is expected to have relevant revenue of $408,000 and relevant variable costs of $198,000. in addition, pink mining would have one source of fixed costs associated with the project. yesterday, pink mining signed a deal with ocean marketing to develop an advertising campaign for the project. the terms of the deal require pink mining to pay ocean marketing either $62,000 in 1 year if the project is pursued or $94,000 in 1 year if the project is not pursued. the tax rate is 20 percent. what is the operating cash flow for year 1 that pink mining should use in its npv analysis of the project? input instructions: round your answer to the nearest dollar. dollars

pink mining is evaluating a 4 - year project that would require an initial investment in equipment of $460,000. accelerated depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 would be 40%, 35%, 15%, and 10%. in year 1, the project is expected to have relevant revenue of $408,000 and relevant variable costs of $198,000. in addition, pink mining would have one source of fixed costs associated with the project. yesterday, pink mining signed a deal with ocean marketing to develop an advertising campaign for the project. the terms of the deal require pink mining to pay ocean marketing either $62,000 in 1 year if the project is pursued or $94,000 in 1 year if the project is not pursued. the tax rate is 20 percent. what is the operating cash flow for year 1 that pink mining should use in its npv analysis of the project? input instructions: round your answer to the nearest dollar. dollars

Answer

Explanation:

Step1: Calculate depreciation

The initial investment in equipment is $I = 460000$. The depreciation rate in year 1 is $d_1=0.4$. So the depreciation in year 1, $D_1 = I\times d_1=460000\times0.4 = 184000$.

Step2: Calculate operating income before - tax

Revenue $R = 408000$, variable costs $VC = 198000$. The fixed - cost related to the advertising deal if the project is pursued is $FC = 62000$. Operating income before - tax, $EBIT=(R - VC - FC - D_1)=(408000-198000 - 62000-184000)= - 36000$. Since $EBIT<0$, the tax is $T = 0$.

Step3: Calculate operating cash flow

Operating cash flow, $OCF=EBIT + D_1+T$. Since $EBIT=-36000$, $D_1 = 184000$ and $T = 0$, $OCF=-36000+184000+0 = 148000$.

Answer:

148000