Question

A proposed new project has projected sales of $141,100, costs of $71,380, and depreciation of $4,980. The tax rate is 22 percent. Calculate operating cash flow using the four different approaches.

  

The EBIT approach

  

The bottom-up approach

   

The top-down approach

  

The tax-shield approach

Answer 1

Sales	141100
less:cost	-71380
Depreciation	-4980
Income before tax (Earning before interest and tax)	64740
less:Tax expense [64740* 22%]	-14242.8
Net Income	50497.20

1)EBIT Approach: EBIT +Depreciation -Taxes

                  = 64740 +4980 -14242.8

                 = 55477.20

2)Bottom Up approach =Net Income +Depreciation

                     = 50497.20+ 4980

                    = 55477.20

3)Top down approach = Sales -cost- Taxes

                      =141100-71380 - 14242.8

                     = 55477.20

4)Tax shield approach = [Sales-cost][1-Tax rate] +[Depreciation *Tax rate]

                      [141100-71380][1-.22] + [4980*.22]

                        [69720 *.78] + 1095.6

                          54381.6+1095.6

                            55477.20