Question

1. Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the operating cash flow for this project?

Answer 1

Answer:

Description                       Year 1           Year 2            Year 3          Year 4

Operating Cash flow        33,000      33,000           33,000           33,000

Explanation:

The question is to prepare a schedule showing the Cash flow from Kurt Kabinet's project over 4 years as follows

Description                  Year 1           Year 2            Year 3          Year 4

Sales                       110,000         110,000            110,000        110,000

Subtract:Costs       ($70,000)      ($70,000)          ($70,000)   ($70,000)

Gross Profit             40,000          40,000            40,000         40,000    

Depreication          (20,000)       (20,000)           (20,000)      (20,000)

Income b/4 tax       20,000        20,000               20,000       20,000

35% tax                   (7,000)         (7,000)                (7,000)       (7,000)

Income after            13,000         13,000                13,000        13,000

Add: Depreciation   20,000       20,000               20,000        20,000

Operating Cash flow 33,000      33,000           33,000           33,000

Depreciation was subtracted as an expense to get the accurate amount of income before and after tax however, it was added back in order to arrive at the operating cashflow.

Depreciation = $80,000 /4 = $20,000  per year