In: Finance
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
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.