Question

How should you use operating costs when calculating incremental cash flows?

Answer 1

Answer:

Subtract operating costs, calculate taxes off of that number, and then add them back.

Explanation:

The computation of the operating cash flow is shown below:

= Earning before interest and taxes + Depreciation - Income tax expense  

where,  

Earning before interest and taxes = Sales - cost of good sold - depreciation expense

While calculating the incremental cash flows we deduct the operating cost, depreciation, tax expense and then added back the depreciation expense as it is a non cash expense