Question

johny trout is planning a $540,000 expansion to its lake. this cost will be depreciated on a straight line basis over a 10 year period. the lake is expected to generate $489,000 in additional annual sales. every year fixed costs are $129,400, with variable costs of $46% of sales, and a tax rate is 34%. what is the operating cash flow for the third year of this project?

a. 106,906.65

b. $107,235.60

Answer 1

First list down the information provided in question:

Cost of Expansion - $ 540,000

Additional Annual Sales - $ 489,000

Variable Cost - 46% of sales i.e. $ 224,940

Annual Fixed Cost - $ 129,400

Tax rate - 34%

Mode of depreciation - SLM Method

Useful life - 10 years

Let us now solve the question:

Following is the basis (formulae) and calculation of operating cash flows:

Operating cash flows are as follows:

Notes:

• As revenues and costs are provided on annual basis and these are equal in all financial years, therefore operating cash flows calculated above will remain same in year 1 to year 10.
• Depreciation needs to be added back while calculating operating cash flows in profit after taxes

Conclusion:

Therefore, operating cash flows in year 3 is $ 107,235.60. Hence, the answer is b.

Trust the same will serve your purpose.

Should you need any clarifications, please feel free to comment.