## 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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