Question

Depreciation and accounting cash flow   A firm in the third year of depreciating its only​ asset,which originally cost $175,000and has a​ 5-yearMACRS recovery period

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	Percentage by recovery​ year*
Recovery year	3 years	5 years	7 years	10 years
1	3333​%	2020​%	1414​%	1010​%
2	4545​%	3232​%	2525​%	1818​%
3	1515​%	1919​%	1818​%	1414​%
4	77​%	1212​%	1212​%	1212​%
5		1212​%	99​%	99​%
6		55​%	99​%	88​%
7			99​%	77​%
8			44​%	66​%
9				66​%
10				66​%
11				44​%
Totals	100100​%	100100​%	100100​%	100100​%

has gathered the following data relative to the current​ year'soperations:

Accruals	$15,300
Current assets	125,000
Interest expense	15,600
Sales revenue	401,000
Inventory	71,000
Total costs before​ depreciation, interest and taxes	288,000
Tax rate on ordinary income	21 %21%

1. Use the relevant data to determine the operating cash flow for the current year.

Complete the following table to determine the operating cash flow​ (OCF):  ​(Round to the nearest​ dollar.)

Operating Cash Flow
Sales revenue	$
Less: Total costs before depreciation, interest, and taxes
Depreciation expense
Earnings before interest and taxes	$
Less: Taxes at 21%
Net operating profit after taxes (NOPAT)	$
Plus: Depreciation
Operating Cash Flow (OCF)	$

Enter any number in the edit fields and then click Check Answer.

b. Explain the impact that​ depreciation, as well as any other noncash​ charges, has on a​ firm's cash flows.

Answer 1

a.

Operating Cash Flow			Amount ($)
Sales revenue	$	a	401000
Less: Total costs before depreciation, interest, and taxes		b	288000
Depreciation expense		c	33582.5
Earnings before interest and taxes	$	d=a-(b+c)	79417.5
Less: Taxes at 21%		e= d*21%	16677.68
Net operating profit after taxes (NOPAT)	$	f= d-e	62739.83
Plus: Depreciation			33582.5
Operating Cash Flow (OCF)	$	f+c	96322.33

depreciation :

rate in 3rd year = 19.19% as given in the table of 5 year rates .

=175000*19.19%

=33582.5

b.

Depreciation is a non cash transaction  . Net profit after tax has the effect of depreciation , but as it is not an actual cash expense it is added back in net profit after tax to calculate the actual cash flow been made through operating activities . inclusion of depreciation reduces the profit thus reducing the tax burden , hence reducing the cash outflow of the business. Thus depreciation and other non cash expenses, that are subtracted from the profit, affects the cash flow by reducing the amount of cash to be paid as tax by them.