Question

Sam's Sports Bar wants to expand their facility. The expansion will require $330,000 in building improvements, which will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $120,000 in additional sales of which 60 percent is variable cost. The fixed costs are $10,000 annually and the tax rate is 35 percent. What is the operating cash flow for the first year of this project?

	a.	$40,200
	b.	$36,895
	c.	$30,475
	d.	$24,700
	e.	$27,025

Answer 1

c.

$30,475

Working:

Calculation of operating cash flow in year 1:
Sales			$       1,20,000
Variable cost			-72,000
Contribution Margin			48,000
Fixed cost other than depreciation expense			-10,000
Depreciation Expense			-16,500
Profit Before Tax			21,500
Tax Expense			-7,525
Net Income			13,975
Depreciation Expense			16,500
Operating Cash flow			$           30,475
Working:
Straight line depreciation		=	Cost of Building / Useful Life of project
		=	330000/20
		=	$           16,500
variable cost		=	Sales *60%
		=	120000*60%
		=	$           72,000
Tax Expense		=	Profit before tax * Tax Expense
		=	21,500	* 35%
		=	7,525