A proposed new project has projected sales of $122,000, costs of $56,000, and de

Question

A proposed new project has projected sales of $122,000, costs of $56,000, and depreciation of $12,500. The tax rate is 30 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.) Show work.

A proposed new project has projected sales of $122,000, costs of $56,000, and depreciation of $12,500. The tax rate is 30 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.) Show work.

Explanation / Answer

1) EBIT+ depreciation- Taxes = $53500+$12500-$16050=$49950

EBIT= Sales-Cost-Depreciation= $122000-$56000-$12500=$53500

Taxes= EBIT*30%=$53500*30%=$16050

2) Top-down= Sales-Cash Cost-Tax= $122000-$56000-$16050= $49950

3) Tax Shield= (Sales- Cash Cost)*(1-Tax rate)+Depreciation * tax rate

=($122000-$56000)*(1-.3)+ $12500*.3= $46200+$3750=$49950

4) Bottom up= Net Income + Depreciation

=EBIt-Tax+Depreciation= $53500-$16050+$12500=$49500

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