Question

Company C expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. The company's federal plus state tax rate is 40% and it has no debt. What is Company C's expected cash flow

Answer 1

Company C's expected cash flow is $2,400,000

Step-by-step explanation:

Costs other than depreciation of Company C = 75% x $12,000,000 = $9,000,000

Income before tax = Sales - Costs other than depreciation - Depreciation expense = $12,000,000 - $9,000,000 - $1,500,000 = $1,500,000

The company's federal plus state tax rate is 40%,

Tax = $1,500,000 x 40% = $600,000

Company C's expected cash flow = Sales - Costs other than depreciation - Tax = $12,000,000 - $9,000,000 - $600,000 = $2,400,000

Note: Depreciation is a non-cash accounting expense, so it doesn't involve cash flow