Question

Given the following project information, calculate the after-tax operating cash flow (ATOCF) using the four approaches of calculating operating cash flow.

Project cost = $950,000

Project life = five years

Projected number of units sold per year = 10,000

Projected price per unit = $200

Projected variable cost per unit = 150

Fixed costs per year = $150,000

Required rate of return = 15%

Marginal tax rate = 35%

Depreciation = Straight-line to zero over five years (ignore half-year rule

Answer 1

1). Operating cash flow (OCF) = EBIT + Depreciation - Tax

EBITDA = number of units sold per year*(price per unit - variable cost per unit) - fixed cost

= 10,000*(200-150) - 150,000 = 350,000

Depreciation per annum = initial cost/life = 950,000/5 = 190,000

EBIT = EBITDA - Depreciation = 350,000 - 190,000 = 160,000

Tax = 35%*EBIT = 35%*160,000 = 56,000

OCF = 160,000 + 190,000 - 56,000 = 294,000

2). OCF = (Sales - Costs) - Tax

Total sales = number of units*price per unit = 10,000*200 = 2,000,000

Total cost = number of units*variable cost per unit + fixed cost = 10,000*150 + 150,000 = 1,650,000

Tax (as calculated above) = 56,000

OCF = (2,000,000 - 1,650,000) - 56,000 = 294,000

3). OCF = (Sales - Cost)*(1-Tax rate) + (Depreciation*Tax)

= (2,000,000 - 1,650,000)*(1-35%) + (190,000*35%) = 294,000

4). OCF = Net income + Depreciation

Net income = EBIT*(1-Tax rate) = 104,000

OCF = 104,000 + 190,000 = 294,000