Question

Carlos Slim is evaluating a project that will increase annual sales by $155,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 21 percent. What is the operating cash flow for this project?

a. $53,965
b. $50,325
c. $46,480
d. $29.920
e. $43,480

Answer 1

The operating cash flow of Carlos Slim's project is $81,465. This was calculated by determining the net operating profit after taxes and adding back the depreciation expense, which is a non-cash charge.

Step-by-step explanation:

To calculate the operating cash flow for Carlos Slim's project, we begin by figuring out the net operating profit after taxes (NOPAT). The increase in annual sales is $155,000, and the increase in annual cash costs is $94,000, so the pre-tax earnings from the project would be:

$155,000 (Sales) - $94,000 (Costs) = $61,000 (Pre-tax earnings)

We must now consider the depreciation expense. Over a 4-year life with straight-line depreciation, the annual depreciation expense on $110,000 in fixed assets is:

$110,000 / 4 = $27,500 (Annual Depreciation)

Subtract this from the pre-tax earnings to get the taxable income:

$61,000 - $27,500 = $33,500 (Taxable Income)

Applying the 21% tax rate gives us the tax amount:

$33,500 x 0.21 = $7,035 (Taxes)

Then subtract the taxes from the pre-tax earnings to get the NOPAT:

$61,000 - $7,035 = $53,965 (NOPAT)

Finally, to find the operating cash flow, we add back the depreciation because it is a non-cash expense:

$53,965 + $27,500 = $81,465 (Operating Cash Flow)