Question

Tubby Toys estimates that its new line of rubber ducks will generate sales of $7.20 million, operating costs of $4.20 million, and a depreciation expense of $1.20 million. If the tax rate is 30%, what is the firm’s operating cash flow?

a. Calculate the operating cash flow for the year by using all three methods:
(a) adjusted accounting profits;
(b) cash inflow/cash outflow analysis; and
(c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.) Method Cash Flow Adjusted accounting profits $ million Cash inflow/cash outflow analysis million Depreciation tax shield approach million

Answer 1

$2.46 million.

Step-by-step explanation:

Profit before tax:

= Sales - Variable costs - Depreciation

= $7.20 - $4.20 - $1.20

= $1.80 million

Net income = Profit before tax - Tax

= $1.80 million - (30% × $1.80)

= $1.80 million - $0.54 million

= $1.26 million

(1) Adjusted accounting profits method:

= Net income + Depreciation

= $1.26 + $1.2

= $2.46 million

(2) Cash inflow/Cash outflow method:

= Sales - Cash expenses - Tax

= 7.2 - 4.2 - 0.54

= $2.46 million

(3) Depreciation tax shield method:

= [(Sales - Costs) × (1-Tax rate)] + (Depreciation × Tax rate)

= [(7.2 - 4.2) × (1 - 30%)] + (1.20 × 30%)

= $2.46 million

Therefore, operating cash flow from all the three method is $2.46 million.