Question

The owner of a bicycle repair shop forecasts revenues of $200,000 a year. Variable costs will be $60,000, and rental costs for the shop are $40,000 a year. Depreciation on the repair tools will be $20,000.

b. Calculate the operating cash flow for the repair shop using the three methods given below:

Now calculate the operating cash flow.

1. Dollars in minus dollars out.
2. Adjusted accounting profits.
3. Add back depreciation tax shield.

Answer 1

	WORKSHEET:
	INCOME STATEMENT
	Revenues		$     200,000
	Less: Expenses:
	Variable cost	$            60,000
	Rental costs	$            40,000
	Depreciation on tools	$            20,000
	Total expenses		$     120,000
	Income before taxes		$       80,000
	Tax at 20%		$       16,000
	Net income		$       64,000
b]
i]	Dollars in minus Dollars out:
	OCF = Revenues-Cash expenses-Taxes = 200000-(60000+40000)-16000 =	$            84,000
ii]	Adjusted accounting profits = Profit after taxes+Non-cash expenses = 64000+20000 =	$            84,000
iii]	Add back depreciation tax shield = (Revenues-Cash expenses)*(1-tax rate)+Depreciation expense*tax rate = (200000-100000)*(1-20%)+20000*20% =	$            84,000