Question

al text of ng the tax swed approach book Was d. Mankind Traders is considering a project that will produce sales of RM28) increase cash expenses by RM17,500 11 the project is implemented, taxes will increase by RM3,000. The additional depreciation expense will be RM60. An initial cash outlay of RM1,400 is required for networking capital. Find the amount of the operating cash flow using the top-down approach. 3 marks) Aish Berhas is evaluating a project that will increase annual sales by RM3800 and annual costs by RM94,000. The project will initially require RM110.000 in fixed assets that will be depreciated straight-line to a zero book value over the 4- year life of the project. The applicable tax rate is 32%. What is the operating cash flow for this project? (3 marks) *** END OF QUESTIONS ***

Answer 1

C: Operating cash flow in a top-down approach = ebit + depreciation - taxes

Ebit = sales – expenses – depreciation = 28,000 – 17,500 – 1,600 = 8,900

Thus operating cash flow = ebit + depreciation - taxes

= 8,900 + 1,600 – 3,000

= 7,500

D: Depreciation = 110,000/4 = 27,500 per year

Hence EBIT = sales – expenses – depreciation = 138,000 – 94,000 – 27,500 = 16,500

Tax amount = ebit * tax rate = 16,500*32% = 5,280

Thus operating cash flow = ebit + depreciation - taxes

= 16,500 + 27,500 – 5,280

= 38,720 per year