Question

Tubby Toys estimates that its new line of rubber ducks will generate sales of $7 million, operating costs of $4 million, and a depreciation expense of $1 million. If the tax rate is 25%, what is the firm’s operating cash flow?

Answer 1

2.5m

Explanation:

Using the adjusted accounting profits method.

Operating cash flow = After - tax profit + Depreciation. .......... ( 1 )

Given that :

* depreciation expense = $1 million

* Sales generated $7 million

* Tax rate = 25%

Tax rate = 25/100

= 0.25

From equation 1

= ( 7m - 4m - 1m ) ×( 1 - 0.25 ). + 1m

= ( 7m - 5m ) × ( 0.75 ) + 1m

= 2m × 0.75 + 1m

= 1.5m + 1m

= 2.5m

The firm operating cash flow = 2.5m