Tubby Toys estimates that its new line of rubber ducks will generate sales of $6
ID: 2711195 • Letter: T
Question
Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.80 million, operating costs of $3.80 million, and a depreciation expense of $.80 million. Assume the tax rate is 35%.
Calculate the 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. (Enter your answers in millions rounded to 2 decimal places.)
Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.80 million, operating costs of $3.80 million, and a depreciation expense of $.80 million. Assume the tax rate is 35%.
Explanation / Answer
Sales
6800000
operating cost
-3800000
Depreciation
-800000
EBIT
2200000
tax 35%
-770000
Net Income
1430000
A)
Adjusted Accounting profits = Revenue – Cash expenses – tax
= 6,800,000 -3,800,000 -770,000
= 2,230,000
Cash inflow/outflow analysis= Net income + depreciation
= 1,430,000 +800,000
= 2,230,000
Depreciation tax shield = (Revenue – cash expense) x(1- t) +Depreciation x t
= (6,800,000 -3,800,000) x(1-0.35) + 800,000 x0.35
= 1,950,000 +280,000
= 2,230,000
B) yes, all the above answers are equal.
Sales
6800000
operating cost
-3800000
Depreciation
-800000
EBIT
2200000
tax 35%
-770000
Net Income
1430000
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