The owner of a bicycle repair shop forecasts revenues of $196,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $196,000 a year. Variable costs will be $59,000, and rental costs for the shop are $39,000 a year. Depreciation on the repair tools will be $19,000. The tax rate is 35%.

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.

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.

Explanation / Answer

A. Accounting profit = (196,000 - 59,000 - 39,000 - 19,000) * 65% = $51,350

Method 1 Adjusted accounting profits

Cash Flow = Profit + Depreciation = 51,350 + 19,000 = $70,350

Method 2 Cash inflow/cash outflow analysis

Cash Flow = 196,000 - 59,000 - 39,000 - 27,650(taxes) = $70,350

Method 3 Depreciation tax shield approach

Cash Flow = (196,000 - 59,000 - 39,000) * 65% + 19,000 * 35% = $70,350

B. Yes, the above answers are equal

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