Question

A company is considering a new 6-year project that will have annual sales of $231,000 and costs of $144,000. The project will require fixed assets of $263,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 40 percent. What is the operating cash flow for Year 2? Multiple Choice O $69,733 O $68,464 O $72,398 O $64,319 O $85,864

Answer 1

The operating cash flow is computed as shown below:

= Earnings before interest and tax + depreciation - tax expenses

Earnings before interest and tax is computed as follows:

= Sales - costs - depreciation

= $ 231,000 - $ 144,000 - $ 263,000 x 32%

= $ 231,000 - $ 144,000 - $ 84,160

= $ 2,840

The tax expenses is computed as follows:

= ( Earnings before interest and tax - interest expenses) x tax rate

= ( $ 2,840 - $ 0 ) x 40%

= $ 2,840 x 40%

= $ 1,136

So, the operating cash flow will be:

= $ 2,840 + $ 84,160 - $ 1,136

= $ 85,864

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