The owner of a bicycle repair shop forecasts revenues of $208,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $208,000 a year. Variable costs will be $62,000, and rental costs for the shop are $42,000 a year. Depreciation on the repair tools will be $22,000. The tax rate is 30%.

Calculate operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach.

The owner of a bicycle repair shop forecasts revenues of $208,000 a year. Variable costs will be $62,000, and rental costs for the shop are $42,000 a year. Depreciation on the repair tools will be $22,000. The tax rate is 30%.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Operating Cash Flow (Adjusted Accounting Profit) = (Revenues - Variable Cost - Fixed Cost - Depreciation)*(1-Tax Rate) + Depreciation = (208000-62000-42000-22000)*(1-0.3) + 22000 = 79400

Operating Cash Flow (Cash Inflow Outflow Analysis) = (Revenues - Variable Cost - Fixed Cost - Depreciation)*(1-Tax Rate) + Depreciation = (208000-62000-42000-22000)*(1-0.3) + 22000 = 79400

Operating Cash Flow (Cash Inflow Outflow Analysis) = (Revenues - Variable Cost - Fixed Cost)*(1- Tax Rate) + Depreciation*Tax Rate = (208000-62000-42000)*(1-.30) + 22000*(.30) = 79400

Part B:

Yes, all the cash flows are equal.

Thanks.

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