Question
What is the operating cash flow for year 2 of project A that Red Royal Packaging should use in its NPV analysis of the project?
What is the operating cash flow for year 2 of project A that Red Royal Packaging should use in its NPV analysis of the project? The tax rate is 30 percent. During year 2, project A is expected to have relevant revenue of 90,000 dollars, relevant variable costs of 16,000 dollars, and relevant depreciation of 16,000 dollars. In addition, Red Royal Packaging would have one source of fixed costs associated with the project A. Yesterday, Red Royal Packaging signed a deal with Ruby Advertising to develop a marketing campaign. The terms of the deal require Red Royal Packaging to pay Ruby Advertising either 26,000 dollars in 2 years if project A is pursued or 40,000 dollars in 2 years if project A is not pursued. Finally, the equipment purchased for the project would be sold in 2 years for an expected after-tax cash flow of 13,000 dollars.
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