Question

A proposed new project has projected sales of $125,000, costs of $59,000, and depreciation of $12,800. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches.

Answer 1

Answer:$47,380

Explanation:

To calculate the Operating Cash Flow using the four different approaches.

1. Operating Cash Flow= EBIT + Depreciation − Taxes

We calculate EBIT first

 Sales of project= 125000  

Cost of project=59000

Depreciation 12800  

Earnings Before Income Tax, EBIT= Sales – (Variable Costs + Fixed Costs) – Depreciation  = 53200

Operating Cash Flow= EBIT + Depreciation − Taxes

Operating Cash Flow= $53,200 + 12,800 − 18,620

=$47,380

2 The top-down approach

Operating Cash Flow = Sales − Costs − Taxes

= $125,000 − 59,000 − 18,620

=$47,380

(3)The tax-shield approach is:

Operating Cash Flow  = (Sales − Costs)(1 − T) + T(Depreciation)($125,000 − 59,000)(1 − 0.35) + 0.35($12,800)

=$47,380

4. The bottom-up approach

  Operating Cash Flow= Net income + Depreciation

First we calculate net income

Sales of project= 125000  

Cost of project=59000

Depreciation 12800  

Earnings Before Income Tax= Sales – (Variable Costs + Fixed Costs) – Depreciation  = 53200

taxes  at 35%=0.35 x 53,200= 18, 620

Net income= 53,200- 18,620=34580

Operating Cash Flow= Net income + Depreciation

$34,580 + 12,800

=$47,380