Question

Pompeii, Inc., has sales of $53,500, costs of $24,400, depreciation expense of $2,600, and interest expense of $2,350. If the tax rate is 25 percent, what is the operating cash flow, or OCF?

Answer 1

The operating cash flow for Pompeii, Inc. can be calculated by first determining earnings before tax, calculating the tax payment, and then using the formula OCF = (Sales - Costs) + Depreciation - Taxes. This results in an OCF of $25,662.50.

Step-by-step explanation:

The question involves calculating the operating cash flow (OCF) for Pompeii, Inc. To determine OCF, we apply the following formula:

OCF = (Sales - Costs) + Depreciation - Taxes

First, we need to calculate the company's earnings before tax and the tax payment:

• Earnings before tax (EBT) = Sales - Costs - Depreciation - Interest expense
• Earnings before tax (EBT) = $53,500 - $24,400 - $2,600 - $2,350
• Earnings before tax (EBT) = $24,150
• Tax payment = EBT × Tax rate
• Tax payment = $24,150 × 25%
• Tax payment = $6,037.50

Now, we can calculate the operating cash flow (OCF):

• OCF = (Sales - Costs) + Depreciation - Taxes
• OCF = ($53,500 - $24,400) + $2,600 - $6,037.50
• OCF = $25,662.50

Therefore, the operating cash flow for Pompeii, Inc. is $25,662.50.