## Info

Total cash flow

- $79,239

+OCF +OCF

+OCF

+OCF

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:

Sales |
? |

Costs |
$94,000 |

Depreciation |
15,000 |

Taxes (39%) |
? |

Net income |
$15,609 |

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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