Pink Research is evaluating a 5-year project that would require an initial investment in equipment of $320,000. Accelerated depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 would be 25%, 40%, 20%, and 15%, respectively. In year 2, the project is expected to have relevant revenue of $218,000 and relevant variable costs of $91,000. In addition, Pink Research would have one source of fixed costs associated with the project. Yesterday, Pink Research signed a deal with Pond Marketing to develop an advertising campaign for the project. The terms of the deal require Pink Research to pay $24,000 to Pond Marketing in 2 years. The tax rate is 45 percent. What is the operating cash flow for year 2 that Pink Research should use in its NPV analysis of the project

To calculate the operating cash flow (OCF) for Year 2, we’ll go through these steps:

1. **Calculate Depreciation for Year 2**
   - The equipment is depreciated according to an accelerated schedule, with 40% of the initial investment taken in Year 2.
   - Depreciation in Year 2 = $ 320,000 \times 0.40 = 128,000 $.

2. **Calculate Earnings Before Interest and Taxes (EBIT)**
   - **Revenue** in Year 2 = $218,000
   - **Variable Costs** in Year 2 = $91,000
   - **Fixed Costs** in Year 2 = $0 (since the advertising deal payment of $24,000 occurs in 2 years but isn’t an operational fixed cost for Year 2 directly)
   
   \[
   \text{EBIT} = \text{Revenue} - \text{Variable Costs} - \text{Depreciation}
   \]
   \[
   \text{EBIT} = 218,000 - 91,000 - 128,000 = -1,000
   \]

3. **Calculate Taxes**
   - With EBIT being negative, no taxes are owed for Year 2.
   - **Taxes** = $ -1,000 \times 0.45 = 0 $.

4. **Calculate Net Income**
   \[
   \text{Net Income} = \text{EBIT} - \text{Taxes} = -1,000 - 0 = -1,000
   \]

5. **Calculate Operating Cash Flow (OCF)**
   - The formula for OCF is:
     \[
     \text{OCF} = \text{Net Income} + \text{Depreciation}
     \]
   - Thus, 
     \[
     \text{OCF} = -1,000 + 128,000 = 127,000
     \]

### Final Answer:
The operating cash flow for Year 2 that Pink Research should use in its NPV analysis is **$127,000**.

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Would you like further clarification or details on any part of this calculation?

### Related Questions:
1. How would the advertising payment impact the NPV in future years?
2. What effect does accelerated depreciation have on cash flows?
3. How would changes in the tax rate alter the operating cash flow?
4. How would adding a salvage value impact this analysis?
5. How would variable cost fluctuations affect the NPV?

#### Tip:
In project evaluations, non-operational cash flows like pre-existing deals are usually considered separately in NPV analysis if they do not impact operational cash flows directly.

Pink Research is evaluating a 5-year project that would require an initial investment in equipment of $320,000. Accelerated depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 would be 25%, 40%, 20%, and 15%, respectively. In year 2, the project is expected to have relevant revenue of $218,000 and relevant variable costs of $91,000. In addition, Pink Research would have one source of fixed costs associated with the project. Yesterday, Pink Research signed a deal with Pond Marketing to develop an advertising campaign for the project. The terms of the deal require Pink Research to pay $24,000 to Pond Marketing in 2 years. The tax rate is 45 percent. What is the operating cash flow for year 2 that Pink Research should use in its NPV analysis of the project?

Calculate the operating cash flow (OCF) for Year 2 of Pink Research's 5-year project. Includes detailed steps on depreciation, revenue, variable costs, and taxation, resulting in an OCF of $127,000. Ideal for business finance students.

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