Question

You consider undertaking the research project. It will increase sales by $100K per year starting next year and its life is 10 years. The maintenance cost is $50K and the depreciation of the equipment is 20K per year. The tax rate is 40% and there are no changes in net operating working capital. What is the annual operating cash flow from the project? A. $10,000 B. $18,000 C. $38,000 D. $30.000

Answer 1

Answer: C. $38,000

Step-by-step explanation:

The Operating cashflow for a project will be the net income earned from it less any taxes but including depreciation.

In formula form;

Operating cash flow = EBIT - tax paid + depreciation

Earnings Before Interest and Tax

= Sales - Expenses

= 100,000 - 50,000 - 20,000

= $30,000

Tax paid

= EBT * 40%

= 30,000 * 40%

= $12,000

Operating cash flow = EBIT - tax paid + depreciation

= 30,000 - 12,000 + 20,000

= $38,000

Note; Depreciation is added back because it is a non-cash expense.