Question

A company is considering a new 6-year project that will have annual sales of $189,000 and costs of $116,000. The project will require fixed assets of $235,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 40 percent. What is the operating cash flow for Year 2?

$61,848

$59,280

$59,467

$73,880

$54,629

Answer 1

Answer is $73,880

Calculations:

Operating cash flow = EBIT + depreciation – taxes.

For year 2 the calculations are:

Sales	189,000.00
less: costs	116,000.00
Gross profit	73,000.00
less: depreciation @ 32% of 235,000	75,200.00
EBIT	-      2,200.00
less: tax @ 40%	-         880.00
Net income	-      1,320.00

Thus the organization has a tax credit of $880 and so $880 will be added back to EBIT along with depreciation. Thus operating cash flow is:

EBIT	-      2,200.00
Add: Depreciation	75,200.00
less: tax	880.00
Operating cash flow	73,880.00

So operating cash flow in year 2 = -2200 + 75200 + 880

= $73,880