Pink Ocean Construction is considering Project X, which would be a 4-year project that would involve opening an office in Charlotte. The project would require an initial investment in equipment of $269,000 that would be depreciated to $125,000 over 8 years using straight-line depreciation. In year 4, the firm expects revenues from the Charlotte office to be $174,000 and associated costs from the Charlotte office to be $126,000. In year 4, the firm also believes that revenues from the Buffalo office would be $37,000 more with the opening of the Charlotte office and that costs associated with the Buffalo office would be $29,000 more with the opening of the Charlotte office. The tax rate is 28 percent. What is the operating cash flow for year 4 that Pink Ocean Construction should use in its NPV analysis of Project X?

 

Input instructions: Round your answer to the nearest dollar.

To determine the operating cash flow for year 4 that Pink Ocean Construction should use in its NPV analysis of Project X, we need to follow these steps:

1. **Calculate Depreciation Expense:**
   - The equipment cost is $269,000 and it will be depreciated to $125,000 over 8 years.
   - Annual depreciation expense = $\frac{269,000 - 125,000}{8}$

   \[
   \text{Annual depreciation expense} = \frac{144,000}{8} = 18,000
   \]

2. **Calculate Incremental Revenues and Costs in Year 4:**
   - **Charlotte Office Revenue:** $174,000
   - **Charlotte Office Costs:** $126,000
   - **Buffalo Office Revenue Increase:** $37,000
   - **Buffalo Office Cost Increase:** $29,000

   Therefore, the total revenue increase in year 4 is:
   \[
   174,000 + 37,000 = 211,000
   \]

   And the total cost increase in year 4 is:
   \[
   126,000 + 29,000 = 155,000
   \]

3. **Calculate Operating Income Before Taxes:**
   - Operating Income = Total Revenues - Total Costs - Depreciation

   \[
   \text{Operating Income} = 211,000 - 155,000 - 18,000 = 38,000
   \]

4. **Calculate Taxes on Operating Income:**
   - Tax Rate = 28%
   - Taxes = Operating Income × Tax Rate

   \[
   \text{Taxes} = 38,000 \times 0.28 = 10,640
   \]

5. **Calculate Net Operating Income After Taxes:**
   \[
   \text{Net Operating Income After Taxes} = 38,000 - 10,640 = 27,360
   \]

6. **Add Back Depreciation (Non-Cash Expense):**
   - Operating Cash Flow = Net Operating Income After Taxes + Depreciation

   \[
   \text{Operating Cash Flow} = 27,360 + 18,000 = 45,360
   \]

### Final Answer:
The operating cash flow for year 4 is **$45,360**.

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Here are five related questions to further explore this topic:
1. How would changes in the tax rate affect the operating cash flow calculation?
2. What impact would a change in depreciation method have on cash flows?
3. How would an increase in the initial investment affect the NPV of Project X?
4. How do incremental revenues and costs from other offices affect project feasibility?
5. What other financial metrics could be useful for assessing Project X's viability?

**Tip:** Always include non-cash expenses like depreciation in cash flow calculations, as they impact taxes but not cash flow directly.

Pink Ocean Construction is considering Project X, which would be a 4-year project that would involve opening an office in Charlotte. The project would require an initial investment in equipment of $269,000 that would be depreciated to $125,000 over 8 years using straight-line depreciation. In year 4, the firm expects revenues from the Charlotte office to be $174,000 and associated costs from the Charlotte office to be $126,000. In year 4, the firm also believes that revenues from the Buffalo office would be $37,000 more with the opening of the Charlotte office and that costs associated with the Buffalo office would be $29,000 more with the opening of the Charlotte office. The tax rate is 28 percent. What is the operating cash flow for year 4 that Pink Ocean Construction should use in its NPV analysis of Project X?

Calculate the year 4 operating cash flow for Project X by Pink Ocean Construction, including depreciation, tax, and incremental revenues. This solution covers key financial concepts such as operating cash flow, tax impact, and straight-line depreciation, suitable for college-level finance or business students.

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