Answer:
1. Adjusted Accounting Profits
- This method gives cashflow by adjusting revenue for expenses.
Earnings before tax
= Revenue - variable cost - rent cost - depreciation
= 240,000 - 70,000 - 50,000 - 30,000
= $90,000
Earnings After tax
= 90,000 ( 1 - tax rate)
= 90,000 ( 1 - 30%)
= $63,000
Add back depreciation as it is a non-cash expense
Operating cashflow = 63,000 + 30,000
= $93,000
2. Cash inflow/cash outflow analysis
Cash outflow is removed from inflow.
= Cash inflow - outflow
= 240,000 - variable cost - rent cost - tax
= 240,000 - 70,000 - 50,000 - 27,000
= $93,000
Tax = Earnings before tax * 30%
= 90,000 * 30%
= $27,000
3. The depreciation tax shield approach.
The tax shield that depreciation affords is added to the earnings after tax.
= Revenue - variable cost - rent cost
= 240,000 - 70,000 - 50,000
= $120,000
After tax = 120,000 * ( 1 - 30%)
= $84,000
Depreciation tax shield = depreciation * tax
= 30,000 * 30%
= $9,000
Cashflow = 84,000 + 9,000
= $93,000
4. Are the above answers equal?
Yes they are. All give an operating cash-flow of $93,000.
