Question

1. Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the operating cash flow for this project?

Answer 1

Description Year 1 Year 2 Year 3 Year 4

Operating Cash flow 33,000 33,000 33,000 33,000

Step-by-step explanation:

The question is to prepare a schedule showing the Cash flow from Kurt Kabinet's project over 4 years as follows

Description Year 1 Year 2 Year 3 Year 4

Sales 110,000 110,000 110,000 110,000

Subtract:Costs ($70,000) ($70,000) ($70,000) ($70,000)

Gross Profit 40,000 40,000 40,000 40,000

Depreication (20,000) (20,000) (20,000) (20,000)

Income b/4 tax 20,000 20,000 20,000 20,000

35% tax (7,000) (7,000) (7,000) (7,000)

Income after 13,000 13,000 13,000 13,000

Add: Depreciation 20,000 20,000 20,000 20,000

Operating Cash flow 33,000 33,000 33,000 33,000

Depreciation was subtracted as an expense to get the accurate amount of income before and after tax however, it was added back in order to arrive at the operating cashflow.

Depreciation = $80,000 /4 = $20,000 per year