Question

A proposed new project has projected sales of $192,000, costs of $91,500, and depreciation of $25,100. The tax rate is 24 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.) Operating Expenses EBIT+Depreciation-Taxes Top=down Tax-shield Bottom-up

Answer 1

Approach	Operating Cash Flow
EBIT + Depreciation - Taxes	$82,404
Top=down	$82,404
Tax-shield	$82,404
Bottom-up	$82,404

INCOME STATEMENT

Income Statement
Sales	$192,000
Less: Costs	$92,500
Less: Depreciation Expense	$25,100
Earnings Before Interest & Tax	$75,400
Less: Tax at 24% [$75,400 x 25%]	$18,096
Net Income	$57,304

(1)-Operating Cash Flow using “EBIT + Depreciation – Taxes” Approach

Operating Cash Flow = EBIT + Depreciation Expenses – Tax Expenses

= $75,400 + $25,100 - $18,096

= $82,404

(2)-Operating Cash Flow using Top-Down Approach

Operating Cash Flow = Sales – Costs – Tax Expenses

= $192,000 - $91,500 - $18,096

= $82,404

(3)-Operating Cash Flow using Tax Shield Approach

Operating Cash Flow = [(Sales – Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [($192,000 - $91,500) x (1 - 0.24)] + [$25,100 x 0.24]   

= [$100,500 x 0.76] + [$25,100 x 0.24]

= $76,380 + $6,024

= $82,404

(4)-Operating Cash Flow using Bottom-Up Approach

Operating Cash Flow = Net Income + Depreciation Expenses

= $57,304 + $25,100

= $82,404

NOTE

The Operating Cash Flow calculated using each of the four different approaches gives the same Operating Cash Flow of $82,404