Total cash flow

- $79,239




As the time line suggests, the operating cash flow is now an unknown ordinary annuity amount. The four-year annuity factor for 20 percent is 2.58873, so we have:

This implies that:

So the operating cash flow needs to be $30,609 each year.

CHAPTER 10 Making Capital Investment Decisions 337

We're not quite finished. The final problem is to find out what sales price results in an operating cash flow of $30,609. The easiest way to do this is to recall that operating cash flow can be written as net income plus depreciation, the bottom-up definition. The depreciation here is $60,000/4 = $15,000. Given this, we can determine what net income must be:

Operating cash flow = Net income + Depreciation $30,609 = Net income + $15,000 Net income = $15,609

From here, we work our way backwards up the income statement. If net income is $15,609, then our income statement is as follows:







Taxes (39%)


Net income


So we can solve for sales by noting that:

Net income = (Sales - Costs - Depreciation) X (1 - T) $15,609 = (Sales - $94,000 - $15,000) X (1 - .39) Sales = $15,609/.61 + 94,000 + 15,000 = $134,589

Sales per year must be $134,589. Because the contract calls for five trucks per year, the sales price has to be $134,589/5 = $26,918. If we round this up a bit, it looks as though we need to bid about $27,000 per truck. At this price, were we to get the contract, our return would be just over 20 percent.

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