Question

A corporation has annual sales of $1,500,000 and costs of $698,000 in the first year. A plant is installed at a cost of $1,200,000. It will be depreciated straight line to zero in its useful life of 4 years. The tax rate is 35%. Calculate the operating cash flow for the first year.

A. $326,300
B. $521,300
C. $626,300
D. $605,300

Answer 1

To calculate the operating cash flow for the first year, subtract the costs and depreciation expense from the sales revenue. The operating cash flow is $521,300.

Step-by-step explanation:

To calculate the operating cash flow for the first year, we need to subtract the costs and depreciation expense from the sales revenue.

The costs include labor, capital, and materials. Accounting profit can be calculated as the difference between total revenues and explicit costs.

In this case, it is $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000. This represents the firm's accounting profit. However, to calculate the operating cash flow, we need to consider the depreciation expense and tax rate as well.

Depreciation expense is the annual deduction for the decrease in value of an asset over time.

In this case, the plant is depreciated straight line to zero in its useful life of 4 years.

So, the annual depreciation expense is $1,200,000 / 4 = $300,000.

The operating cash flow can be calculated as: Sales revenue - Costs - Depreciation * (1 - Tax rate) = $1,500,000 - $698,000 - $300,000 * (1 - 0.35) = $521,300.