Question
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A company reported $750,000 of sales, 75% of operating costs other than depreciation, and $7,500 of...
A company reported $750,000 of sales, 75% of operating costs other than depreciation, and $7,500 of depreciation. It had $75,000 of bonds that carry a 7.5% interest rate, and its tax rate was 25%. How much was its net cash flow?
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Expert Solution
Solution:
The Operating Cash Flow is calculated using the formula
= [ ( Sales – Operating Costs – Depreciation – Interest Expense ) * ( 1 – Tax Rate ) ] + Depreciation Expense
As per the Information given in the question
Sales = $ 750,000 ; Depreciation = $ 7,500 ;
Value of bonds = $ 75,000 ; Interest rate = 7.5 % ;
Interest Expense = Value of bonds * Interest rate = $ 75,000 * 7.5 % = $ 5,625 ;
Operating Costs = 75 % of sales = 75 % * $ 750,000 = $ 562,500 ;
Tax Rate = 25 % = 0.25 ;
Thus applying the above information in the formula we have net cash flow as
= [ ( $ 750,000 - $ 562,500 - $ 7,500 - $ 5,625 ) * ( 1 – 0.25 ) ] + $ 7,500
= [ $ 174,375 * ( 1 – 0.25 ) ] + $ 7,500
= [ $ 174,375 * 0.75 ] + $ 7,500
= $ 130,781.25 + $ 7,500
= $ 138,281.25
= $ 138,281 ( when rounded off to the nearest dollar )
Thus the net cash flow = $ 138,281
jeff jeffy answered 1 year agoRelated Solutions
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