Question

A company sells Widgets to consumers at a price of $81 per unit. The costs to produce Widgets is $35 per unit. The company will sell 14,000 Widgets to consumers each year. The fixed costs incurred each year will be $140,000. There is an initial investment to produce the goods of $2,300,000 which will be depreciated straight line over 17 year life of the investment to a salvage value of $0. The opportunity cost of capital is 9% and the tax rate is 35%.

What is operating cash flow each year? ____
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Answer 1

The operating cash flow each year is determined by calculating the company's revenue, deducting variable and fixed costs, adjusting for taxes, and adding back depreciation. The resulting operating cash flow for the company is $462,894.

Step-by-step explanation:

To calculate the operating cash flow of the company, we need to consider the revenue from sales, the variable costs, the fixed costs, and also account for taxes and depreciation. From the revenue, we deduct the variable costs (cost to produce per unit times the number of units) and the fixed costs. We then subtract taxes, which is the tax rate applied to the profit (revenue minus all costs). Additionally, we add back depreciation since it is a non-cash expense. The formula for operating cash flow (OCF) is: OCF = (Revenue - Variable Costs - Fixed Costs) * (1 - Tax Rate) + Depreciation.

Now, let's use the information provided:

• Sales Revenue: $81 per unit * 14,000 units = $1,134,000
• Variable Costs: $35 per unit * 14,000 units = $490,000
• Fixed Costs: $140,000
• Depreciation: $2,300,000 / 17 years = $135,294

Thus, before taxes, the profit is $1,134,000 - $490,000 - $140,000 = $504,000. The tax on this profit is 35% of $504,000, which is $176,400. After taxes, the profit is $504,000 - $176,400 = $327,600. Adding back the depreciation gives us the operating cash flow: $327,600 + $135,294 = $462,894.

Therefore, the operating cash flow each year is $462,894.