Question

a proposed new project has projected sales of $164,000, costs of $87,000, and cca of $15,200. the tax rate is 35%. calculate operating cash flow using the four different approaches described in the chapter and verify that answer is same in each case

Answer 1

The operating cash flow is calculated by subtracting costs and CCA from sales, determining the tax, and adjusting the net income after tax by adding back the CCA. The resulting OCF for the projected new project, considering the provided data and a 35% tax rate, is $55,370.

Step-by-step explanation:

The goal is to calculate the operating cash flow (OCF) of a projected new project using the given data: projected sales of $164,000, costs of $87,000, and capital cost allowance (CCA) of $15,200. As the provided information from a previous chapter suggests, there can be different approaches to calculate OCF, but since these specific approaches have not been described in the question, we will follow a general method to demonstrate the calculation. It should be noted that the requested confirmation that the OCF is the same using four different approaches cannot be addressed here as those specific approaches are not provided.

The calculation of OCF can be done through the following steps, considering a tax rate of 35%:

1. Calculate taxable income by subtracting both costs and CCA from sales, which would be $164,000 - $87,000 - $15,200 = $61,800 (taxable income).
2. Calculate the tax on the taxable income: 35% of $61,800 = $21,630.
3. Calculate net income after tax by subtracting the tax from taxable income: $61,800 - $21,630 = $40,170.
4. Finally, calculate the operating cash flow by adding the CCA back to the net income: $40,170 + $15,200 = $55,370.

The result is the operating cash flow, which should be utilized for investment decisions. Additionally, it should remain consistent when calculated with any correct approach that takes into account sales, costs, CCA, and the tax rate.