Question

A company sells Widgets to consumers at a price of $96 per unit. The cost to produce Widgets is $23 per unit. The company will sell 11,000 Widgets to consumers each year. The fixed costs incurred each year will be $130,000. There is an initial investment to produce the goods of $3,400,000 which will be depreciated straight line over the 18 year life of the investment to a salvage value of $0. The opportunity cost of capital is 9% and the tax rate is 30%.

What is operating cash flow each year?

Answer 1

The operating cash flow each year is $527,767, calculated by taking into account the annual revenue, cost of goods sold, fixed costs, depreciation, and taxes.

Step-by-step explanation:

The question concerns the calculation of the operating cash flow of a company selling widgets. To calculate the operating cash flow, we must consider the revenues, costs, tax implications, and depreciation. The steps are as follows:

• Calculate the annual revenue: 11,000 units × $96/unit = $1,056,000.
• Calculate the annual cost of goods sold (variable costs): 11,000 units × $23/unit = $253,000.
• Subtract the cost of goods sold from the revenue to get the gross profit: $1,056,000 - $253,000 = $803,000.
• Add fixed costs: $803,000 - $130,000 = $673,000.
• Calculate the annual depreciation expense: $3,400,000 / 18 years = $188,889.
• Subtract the depreciation from the earnings before taxes: $673,000 - $188,889 = $484,111.
• Calculate the tax expense: $484,111 × 30% = $145,233.
• Subtract the tax from the earnings before taxes to obtain the net income: $484,111 - $145,233 = $338,878.
• Add back the depreciation to the net income to find the operating cash flow: $338,878 + $188,889 = $527,767.

Therefore, the operating cash flow each year is $527,767.