Question

Bennett Co. has a potential new project that is expected to generate annual revenues of $255,800, with variable costs of $141,200, and fixed costs of $59,200. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $21,000. The annual depreciation is $23,800 and the tax rate is 40 percent. What is the annual operating cash flow?

Answer 1

To calculate the annual operating cash flow for Bennett Co.'s new project, we start with annual revenues, subtract variable and fixed costs, add back depreciation (a non-cash charge), and subtract taxes calculated on the taxable income. The result, which does not include interest expenses because these are not considered in operating cash flow calculation, is $66,560.

Step-by-step explanation:

To calculate the annual operating cash flow for Bennett Co.'s potential new project, we use the following formula:

1. Start with annual revenues.
2. Subtract variable costs.
3. Subtract fixed costs.
4. Subtract interest expense (not used in the calculation of operating cash flow).
5. Add back depreciation expense (a non-cash charge).
6. Calculate the taxes (Tax Rate * (Revenues - Variable Costs - Fixed Costs - Depreciation)).
7. Subtract the taxes from the pre-tax income.
8. The result is the annual operating cash flow.

First, we calculate the earnings before interest and taxes (EBIT):

EBIT = Revenues - Variable Costs - Fixed Costs

EBIT = $255,800 - $141,200 - $59,200 = $55,400

Next, we calculate the tax payable:

Tax Payable = Tax Rate * (EBIT - Depreciation)

Tax Payable = 0.40 * ($55,400 - $23,800) = $12,640

Finally, we calculate the operating cash flow:

Operating Cash Flow = EBIT + Depreciation - Tax Payable

Operating Cash Flow = $55,400 + $23,800 - $12,640 = $66,560

The annual operating cash flow for Bennett Co.'s new project is $66,560.

Answer 2

Operating cash flow= 30,160

Step-by-step explanation:

Giving the following information:

Bennett Co. has a potential new project that is expected to generate annual revenues of $255,800, with variable costs of $141,200, and fixed costs of $59,200. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $21,000. The annual depreciation is $23,800 and the tax rate is 40 percent.

Revenues= 255,800

Variable cost= 141,200 (-)

Fixed cost= 59,200 (-)

Interest= 21,000 (-)

Depreciation= 23,800 (-)

EBT= 10,600

Tax= 4240 (-)

Depreciation= 23,800

Operating cash flow= 30,160