Consider the following scenario:

Your firm is considering a two-year project to build desks for Target. You have just signed a three-year lease for proprietary software that Wal-Mart requires its vendors to have. The first of three annual payments of $25,000 is due tomorrow. This can be expensed on your taxes.

• Your firm is in the 34 percent tax bracket and has a ten percent weighted average cost of capital

• Your variable cost per desk is $250; the contractual selling price is $400 per desk; the contract calls for the delivery of 500 desks per year for two years. You will be paid at the end of year one and the end of year two. Fixed costs are $20,000 per year, also paid at year-end.

• You will have to buy woodworking equipment with a cost of $60,000. IRS rules place this equipment in a five-year property class, therefore you will depreciate this equipment straight- line to zero over five years. At the end of year two this equipment is expected to have a (pre-tax) market value of $20,000.

• You are considering housing the factory in a building that your firm already owns. Today the building has a (pre-tax) market value of $100,000, a book value of $20,000, and going-forward depreciation charges of $10,000 per year. In two years time the building is expected to have a market value of $120,000.

• The project will require a $30,000 investment in net operating working capital today, which is recoverable at the end of the project.

Calculate the following questions in Excel

1. Calculate the Operating Cash Flow at time zero.

2. Calculate the Operating Cash Flow at the end of the first year.

3. Calculate the Operating Cash Flow at the end of the second year.