Question

You work for Athens Inc. and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow? (Points : 6)

Sales revenues: $15,000
Depreciation: $4,000
Other operating costs: $6,000
Tax rate: 35%

a) $7,250
b) $7,431
c) $7,617
d) $7,807
e) $8,003

Answer 1

a) $7,250

Step-by-step explanation:

First, find the Earnings Before Interest and Taxes (EBIT):

`EBIT = \$15,000-\$4,000-\$6,000\\EBIT = \$5,000`

Then, apply taxes to the EBIT:

`E = EBIT*(1-0.35)=\$5,000*0.65\\E=\$3,250`

Finally, Since depreciation is not an operating expense, add it to the earnings to find the operating cash flow (OCF):

`OCF = \$3,250+\$4,000\\OCF = \$7,250`