Question

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A proposed new project has projected sales of $171,700, costs of $86,860, and depreciation of $6,060....

A proposed new project has projected sales of $171,700, costs of $86,860, and depreciation of $6,060. 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 ppproach

Expert Solution

Calculation of operating cash flow using EBIT approach:

EBIT = Sales - costs - depreciation
= $171,700 - $86,860 - $6,060
= $78,780.

Tax paid = $78,780 * 22% = $17,331.60

Operating cash flow = EBIT + depreciation - tax paid
= $78,780 + $6,060 - $17,331.60
= $67,508.40

Operating cash flow = $67,508.40

Calculation of operating cash flow using bottom up approach:

operating cash flow = Net income + depreciation
= $61,448.40 + $6,060
= $67,508.40

operating cash flow = $67,508.40

Calculation of operating cash flow using top down approach:

EBIT = Sales - costs - depreciation
= $171,700 - $86,860 - $6,060
= $78,780.

Tax paid = EBIT * Tax rate
= $78,780 * 22%
= $17,331.60

operating cash flow = EBIT - tax paid + depreciation
= $78,780 - $17,331.60 + $6,060
= $67,508.40

operating cash flow = $67,508.40

Calculation of operating cash flow using tax shield method:

Operating cash flow = (Sales - Cost) (1-tax rate) + depreciation * Tax rate
= ($171,700 - $86,860) * (1 - 0.22) + $6,060 * 22%
= $84,840 * 0.78 + $1,333.2
= $66,175.20 + $1,333.20
= $67,508.40

Operating cash flow = $67,508.40

jeff jeffy answered 1 year ago

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