Question

Laurel’s lawn care limited has a new mower line that can generate revenues of $129,000 per year. direct production costs are $43,000, and the fixed costs of maintaining the lawn mower factory are $16,500 a year. the factory originally cost $0.86 million and is being depreciated for tax purposes over 20 years using straight-line depreciation. calculate the operating cash flows of the project if the firm’s tax bracket is 25%.

Answer 1

To calculate the operating cash flow for Laurel's Lawn Care Limited, annual depreciation is found to be $43,000, which is then used along with direct production costs and revenues to compute taxable income, taxes, net income, and ultimately the operating cash flow, which amounts to $75,250 per year.

Step-by-step explanation:

To calculate the operating cash flows for Laurel's Lawn Care Limited, we need to consider revenues, direct production costs, fixed costs, depreciation, and taxes. The following steps are taken to compute the cash flows:

1. Calculate depreciation: The factory cost is $0.86 million and is depreciated over 20 years using straight-line depreciation. This gives an annual depreciation expense of $43,000 ($860,000 / 20).
2. Compute taxable income: Subtract both direct production costs and depreciation from revenues to find taxable income. Taxable income = $129,000 (revenues) - $43,000 (direct costs) - $43,000 (depreciation) = $43,000.
3. Calculate tax: With a tax rate of 25%, the tax amount is 25% of taxable income, so Tax = 25% of $43,000 = $10,750.
4. Determine net income: Subtract the tax from taxable income to find net income. Net income = $43,000 (taxable income) - $10,750 (tax) = $32,250.
5. Compute operating cash flow: Add back depreciation to net income because it's a non-cash expense. Operating cash flow = $32,250 (net income) + $43,000 (depreciation) = $75,250.

Therefore, the operating cash flow for the project is $75,250 per year.