Question

Operating Cash Flow

The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales	$20 million
Operating costs (not including depreciation)	7 million
Depreciation	4 million
Interest expense	3 million

The company faces a 35% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Answer 1

Calculations	Particulars	Amount $
A	Projected sales	20000000
B	Operating costs (not including depreciation)	7000000
C	Depreciation	4000000
D = A-B-C	Profit Before Interest and Taxes	9000000
E	Interest expense	3000000
F = D - E	Profit Before Taxes	6000000
G = F x 35%	Taxes	2100000
H = F - G	Profit After Taxes	3900000
I = C + H	Operating Cash Flow	7900000

Answer 2

(Projected Sales - Operating costs (not including depreciation))*(1-Tax Rate)+(Depreciation*Tax Rate)        

(20,000,000-7,000,000)*.65+(4,000,000*0.35)        

=9,850,000