Question

Tubby Toys estimates that its new line of rubber ducks will generate sales of $7.10 million, operating costs of $4.10 million, and a depreciation expense of $1.10 million. If the tax rate is 40%, what is the firm’s operating cash flow? (Do not round your intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

To find Tubby Toys' operating cash flow, we subtract operating costs and depreciation from sales, calculate the tax, subtract it from EBIT to get net income, and then add depreciation back to get an operating cash flow of $2.24 million.

Step-by-step explanation:

To calculate Tubby Toys' operating cash flow (OCF), we need to consider the firm's revenues, operating costs, depreciation expense, and tax rate. Here's the step-by-step calculation:

1. Start with the sales revenue, which is $7.10 million.
2. Subtract operating costs of $4.10 million.
3. Subtract the depreciation expense of $1.10 million from the result of step 2 to find earnings before interest and taxes (EBIT).
4. Calculate the tax by multiplying the EBIT by the tax rate of 40%.
5. Subtract the tax from the EBIT to get net income.
6. Add the depreciation expense back in since it's a non-cash charge to get the operating cash flow.

Here are the calculations:

• EBIT = Sales - Operating Costs - Depreciation = $7.10M - $4.10M - $1.10M = $1.90M
• Tax = EBIT × Tax Rate = $1.90M × 40% = $0.76M
• Net Income = EBIT - Tax = $1.90M - $0.76M = $1.14M
• Operating Cash Flow = Net Income + Depreciation = $1.14M + $1.10M = $2.24M

Therefore, the operating cash flow for Tubby Toys is $2.24 million.