Question

In: Finance

a) A proposed new investment has projected sales of $950,000. Variable costs represent 60% of sales,...

a) A proposed new investment has projected sales of $950,000. Variable costs represent 60% of sales, and fixed costs are $210,000; depreciation is $102,000. What is the projected operating cash flow assuming a tax rate of 35%.    5pts

        b) Consider the following income statement:

                                   

                                    Sales                                                        $687,500

                                   Operating Costs                                         343,860

                                    Depreciation                                              110,000

                                    Net Operating Profit                                       ?

                                    Taxes (35%)                                                    ?

                                    Net Profit                                                         ?

           

Fill in the missing numbers and then calculate the operating cash flow.                      5pts

Solutions

Expert Solution

Answer (a)

Operating cash flow (OCF) is cash generated from normal operations of a business. It's formula is as below:

Operating Cash Flow (OCF) = Operating Income (revenue – cost of sales) + Depreciation – Taxes +/- Change in Working Capital

Lets us first start with calculating Net Income ( so that tax impact is taken)

Sales : 950000

Less : Variable Cost(60%) : 570000

Less: Fixed Cost : 210000

Less: Depreciation : 102000

Operating Profit   : 258000

Less: Taxes (35%) : 77400

Net Profit : 180600

Therefore Operating Cash Flow will be as below:

Net Income + Depreciation

180600 + 102000

282600 (Answer)

* Note: we have directly taken Net Income instead of operating income minus taxes, as Net income already includes the tax impact. Working capital details were not mentioned in the question.

Answer (b)

Income statement is presented as below:

Sales : 687500

Less: Operating Costs : 343860

Less: Depreciation : 110000

Net Operating Profit : 233640

Less: Taxes (35%) : 81774

Net Profit   : 151866

Therefore Operating Cash Flow will be as below:

Net Income + Depreciation

151866 + 110000

261866 ( Answer )

* Note : In the absence of absolute information, we have taken operating costs to be exclusive of Depreciation. Generally depreciation is an operating expense. If Operating costs is to be taken inclusive of depreciation, then the calculation will be changed accordingly.

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