Question

7. Net cash flow

You are the CFO of ABC Corp. You are looking to hire a financial analyst, and you’ve given an assignment to two short-listed candidates. You’ve given the following information to both job applicants:

•	The company just reported net sales of $5,937,500. Assume that there are no noncash sales.
•	Its operating costs (excluding depreciation and amortization) are 65% of the company’s total revenues.
•	The depreciation and amortization expenses are 5% of total sales.
•	Its interest charges are 15% of earnings before interest and taxes (EBIT), and it pays a tax rate of 40%.

You’ve asked the candidates to give you a number that best represents the cash flow situation of the company.

Net cash flow or Net Income is the money that the business is left with after paying its operating expenses, interest expense, and taxes. However, because some revenues and expense do not involve the making of cash payments, the firm’s net income may differ from the company’s true net cash flow situation.

Kurt submits a report stating that the firm has $1,205,312 in available net cash flow, while Jake's report states that the firm has $908,437 in net cash flow.

Based on the information given to them, which applicant has provided a better estimate of the company’s current cash flows?

Kurt or Jake??

Answer 1

Net sales	5,937,500
Less : Operating costs (65% of 5937500)	(3,859,375)
Less : Depreciation (5% of 5,937,500)	(296,875)
EBIT	1,781,250
Less : interest charges (15% of EBIT)	(267187.5)
EBT	1,514,062
Less : Tax @ 40%	(605,625)
Profit after tax	908437
Add:Depreciation	296875
Net Cash Flow	1,205,312

it can be seen that net cash flow is $1,205,312 (we have to add back depreciation because it does not involve any cash payment).

so Kurt has provided better estimate of the company's current cash flow