Question

Problem 13-2 Operating Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales $25 million Operating costs (not including depreciation) 10 million 6 million Depreciation Interest expense 4 million The company faces a 35% tax rate. What is the project's operating cash flow for the first year (t completely. For example, 2 million should be entered as 2,000,000. 1)? Write out your answer

Answer 1

Answer:

$ 11,850,000

Workings:

$25,000,000 $10,000,000 $6,000,000 Projected sales Operating Expenses: Operating costs (excluding depreciation) Depreciation Total operating expenses Operating profit Tax at 35% NOPAT Add back depreciation Operating cash flows $16,000,000 $9,000,000 $3,150,000 $5,850,000 $6,000,000 $11,850,000

Answer 2

Another way to answer the problem is:

(Projected Sales - Operating costs (not including depreciation))*(1-Tax Rate)+(Depreciation*Tax Rate)        

(25,000,000-10,000,000)*.65+(6,000,000*0.35)        

=11,850,000