Question

Laurel’s lawn care limited has a new mower line that can generate revenues of $120,000 per year. Direct production costs are $40,000, and the fixed costs of maintaining the lawn mower factory are $15,000 a year. The factory originally cost $1 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 25%.

Answer 1

From the given information, if the firm’s tax bracket is 25%, the operating cash flows of the project is $58750

Revenues                           = $120,000

Direct cost                          = $40,000

Fixed cost                           = $15,000

Gross Profit                         = Revenues - Direct cost - Fixed cost

                                            = 120000 - 40000 - 15000 = $65,000

Depreciation                       = 1000000/25 = $40000

Profit before tax                  = 65000 - 40000 = $25000

Tax expense                        = 25000 × 0.25 = $6250

Profit after tax                      = 25000 - 6250 = $18750

Add Depreciation                = 40000

Operating cash flows          = Profit after tax + Depreciation

                                             =18750 + 40000 = $58750

• A key indicator of how financially successful a company's fundamental business operations are is operating cash flow.
• The first line of a cash flow statement, which also contains cash from investment and financing operations, shows operating cash flow.
• On a cash flow statement, operating cash flow can be shown using either the direct technique or the indirect approach.
• In the indirect technique, non-cash items are first added back to net income from the income statement to get a cash basis figure.
• The cash basis for all transactions is tracked using the direct method, which records actual cash inflows and outflows on the cash flow statement.

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