Question

Kurt's Cabinets 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 percent. What is the operating cash flow for this project?
Select one:

a. $7,000

b. $13,000

c. $27,000

d. $33,000

e. $40,000

Answer 1

Answer:

d. $33,000

Explanation:

The computation of the operating cash flow is shown below:

= EBIT + Depreciation - Income tax expense

where,  

EBIT = Sales - cost of good sold - depreciation expense  

= $110,000 - $70,000 - $20,000

= $20,000

The depreciation expense would be

= (Original cost - residual value) ÷ useful life

= ($80,000 - $0) ÷ 4

= $20,000

And the income tax expense equal to

= EBIT × tax rate

= $20,000 × 35%

= $7,000

Now put these values to the above formula  

So, the value would equal to

= $20,000 + $20,000- $7,000

= $33,000