Question

expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. the product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. the firm recently spent $2,000 on a study to estimate the revenues of the new product. the tax rate is 20%. what is the operating cash flow in year 1? answer to nearest whole dollar amount.

Answer 1

To calculate the operating cash flow in year 1, we need to consider the given information on expenses and working capital. We also need to subtract the depreciation expense from the operating cash flow. The operating cash flow calculation involves considering revenue, expenses, and working capital.

Step-by-step explanation:

To calculate the operating cash flow in year 1, we need to follow the given information.

The expenses are expected to be 50% of revenues and working capital required in each year is expected to be 20% of revenues in the following year.

First, we need to calculate the revenue in year 1. The firm recently spent $2,000 on a study to estimate the revenues of the new product.

Let's assume the estimated revenue is R. Then, the revenue in year 1 would be 2 * R.

The operating cash flow in year 1 can be calculated as follows: Operating Cash Flow = Revenue - Expenses - Working Capital

Revenue in year 1 = 2 * R
Expenses = 50% of Revenue = 0.5 * 2 * R
Working Capital in year 1 = 20% of Revenue in year 2 = 0.2 * R
Therefore, Operating Cash Flow in year 1 = 2 * R - 0.5 * 2 * R - 0.2 * R

Remember to consider the immediate investment of $40,000 in plant and equipment that will be depreciated over 5 years.

You need to subtract the depreciation expense from the Operating Cash Flow to obtain the final result.