Question

A proposed new project has projected sales of $159,800, costs of $80,840, and depreciation of $5,640. The tax rate is 24 percent. Calculate operating cash flow using the four different approaches. The EBIT approach

Answer 1

Answer:

Explanation:

In order to calculate the OCF, we first need to calculate net income.

We have:

Sales: $159,800

• Cost:  -$80,840
• Depreciation  $5,640

EBT : $73,320

• Tax = $73,320*24% = $17,596.8

Net income : $55,723.2

Using the most common financial calculation for OCF, we get:

OCF = EBIT + Depreciation - Taxes

OCF = $73,320 + $5,640 - $17,596.8

OCF = $61,363.2

The top-down approach to calculating OCF yields:

OCF = Sales - Costs - Taxes

OCF = $159,800 - $80,840 - $17,596.8

OCF = $61,363.2

The tax-shield approach is:

OCF = (Sales - Costs)(1 - tC) + tCDepreciation

OCF = ($159,800 - $80,840)(1 - 0.24) + 0.24*$5,640

OCF =$61,363.2

And the bottom-up approach is:

OCF = Net income + Depreciation

OCF = $55,723.2 +$5,640

OCF = $61,363.2

Hope it will find you well