Question

A proposed new project has projected sales of $201,000, costs of $93,000, and depreciation of $25,400. The tax rate is 22 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.)

Answer 1

Please see below

Step-by-step explanation:

• Approach 1

Tax shield approach

[(Sales - Expenses)(1-t) + Depreciation(t)]

[($201,000 - $93,000)(1-0.22) + $25,400(0.22)

Operating cash flow = $84,240 + $5,588

Operating cash flow = $89,828

• Approach 2

Free cash flow

EBIT [$201,000 - $93,000 - $25,400]

$82,600

Add: Depreciation

$25,400

Less: Taxes 22%(0.22 × $82,600)

($18,172)

Operating cash flow

$89,828

• Approach 3

Button up approach

Net income + Depreciation

Operating cash flow = $64,428 + $25,400

Operating cash flow = $89,828

• Approach 4

Top down approach

EBIT(1-t) + Depreciation

Operating cash flow = $82,600(1 - 0.22) + $25,400

Operating cash flow = $64,428 + $25,400

Operating cash flow = $89,828