http:/fezto.mheducation.com/hm.tpx rk Ch. 9 &Powerpoint; Question 5 (of 6) value

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http:/fezto.mheducation.com/hm.tpx rk Ch. 9 &Powerpoint; Question 5 (of 6) value 10.00 points The owner of a bicycle repair shop forecasts revenues of $160000 a year Variable costs will be $50,000 and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000 The tax rate is 35%. a. Calculate operating cash flow for the year by using all three methods (a) adjusted accounting profits; (b) cash inflowicash outflow analysis, and (c) the depreciation tax shield approach. Method Cash Flow Adjusted accounting profits Cash inflow/cash outflow analysis Depreciation tax shield approach b. Are the above answers equal? e Yes No References Worksheet

Explanation / Answer

Answer )

Pre-tax profit = 160,000 - (30,000 + 50,000) -10,000 = 70,000

Net Income = 70,000 * (1-0.35) = 45500

OCF Calculation

1) Bottom up approach

OCF = NI + Depeciation = 45500 + 10000 = 55500

2) Top Down approach

OCF = Sales - cost -taxes

= 160000-(3,000+5000)-24,500 = 55500

3) Tax Shield approach

OCF = (Sales -cost )*(1-tax ) + Depreciation x tax

=(160000 - 30000-50000)*(1-0.35) + 10,000 x 0.35 = 55500

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