Question

Depreciation and accounting cash flow   A firm in the third year of depreciating its only​ asset, which originally cost

$ 187,000 and has a​ 5-year MACRS recovery period , has gathered the following data relative to the current​ year's operations:

Accruals

$ 15,600

Current assets	119,000
Interest expense	15,900
Sales revenue	414,000
Inventory	70,500
Total costs before​ depreciation, interest and taxes	285,000
Tax rate on ordinary income	21 %

a. Use the relevant data to determine the operating cash flow for the current year.

b. Explain the impact that​ depreciation, as well as any other noncash​ charges, has on a​ firm's cash flows.

Operating Cash Flow
Sales revenue	$
Less: Total costs before depreciation, interest, and taxes
Depreciation expense
Earnings before interest and taxes	$
Less: Taxes at 21%
Net operating profit after taxes (NOPAT)	$
Plus: Depreciation
Operating Cash Flow (OCF)	$

Answer 1

187000 Given Original cost of asset MACRS 5 years Depreciation Rates Year 1 20% Year 2 32% Year 3 19.20% Year 4 11.52% Year 5 11.52% Year 6 5.76% Tax Rate 21% Solution a. Depreciation - Original cost x Year 3 depreciation rate = 187000 x 19.20% = 35904 Operating Cash Flow Particulars Sales revenue Less: Total costs before depreciation, interest, and taxes Less: Depreciation expense Earnings before interest and taxes Less: Taxes at 21% Net operating profit after taxes (NOPAT) Plus: Depreciation Operating Cash Flow (OCF) Amount 414000 285000 35904 93096 19550 73546 35904 109450 Hence, Operating cashflow for current year is $109450 b. Depreciation is not cash expenditure and provide a tax shield in calculation of NOPAT. Hence, it increases operating cash flow of Firm as it is added back for calculation of operating cashflow and also provide tax shield.