Cash Flows: A new project will generate sales of $74 million, costs of $42 milli

Question

Cash Flows: A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firms tax rate is 35%. Calculate cash flow for the year by using all three methods listed below, and confirm that they are equal. (LO2).

Method #1: Dollars in Minus Dollars Out

(Operating cash flow = revenues - cash expenses - taxes)

Method #2: Adjusted Accounting Profits

(Operating cash flow = after tax profit + depreciation)

Method #3: Add back depreciation tax shield

(Operating cash flow = (revenues - cash expenses) x (1- tax rate) + tax rate x depreciation

Explanation / Answer

Method #1: Dollars in Minus Dollars Out revenues 74 cash expenses 42 taxes(74-42-10)*.35 7.7 Operating cash flow 24.3 Method #2: Adjusted Accounting Profits revenues 74 cash expenses 42 Depreciation 10 Before Tax Profit 22 Tax 7.7 after tax profit 14.3 Depreciation 10 Operating cash flow 24.3 Method #3: Add back depreciation tax shield =(74-42)*0.65+10*0.35 =24.30

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