Question

A project will reduce costs by $36,400 but increase depreciation by $16,900. What is the operating cash flow if the tax rate is 34 percent?

a. $23,530
b. $24,024
c. $18,122
d. $35,178
e. $29,770

Answer 1

Net effect on income= $29,770 increase

Step-by-step explanation:

Giving the following information:

Reduced costs= $36,400

Increase depreciation= $16,900

The reduction in costs will increase the EBIT but will decrease the tax shield. On the other hand, the increase in depreciation will increase the tax shield.

Reduction of costs= 36,400

Decrease in tax shield= (36,400*0.34)= (12,376)

Increase in tax shield= 16,900*0.34= 5,746

Net effect on income= $29,770 increase