Tubby Toys estimates that its new line of rubber ducks will generate sales of $7
ID: 2744502 • Letter: T
Question
Tubby Toys estimates that its new line of rubber ducks will generate sales of $7.30 million, operating costs of $4.30 million, and a depreciation expense of $1.30 million. Assume the tax rate is 30%.
a. calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits: (b) cash inflow/cash outflow analysis; (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places)
method cash flow
adjusted accounting profits ___________million
cash inflow/cash outflow analysis ___________million
depreciation tax shield approach ___________million
b. are the above answers equal? (yes or no)
Explanation / Answer
a.
Adjusted accounting profit operating cash flow = (Sales – Operating costs) × (1 – tax rate) + Depreciation
= (7.30 – 4.30) × (1 – 0.30) + 1.30
= $3.40 million
b.
Cash inflow/cash outflow analysis for operating cash flow = Cash inflows – Cash outflows
= 7.30 – (Cash expenses + Tax)
= 7.30 – (3 + 0.9)
= $3.40 million
c.
Cash expenses = Operating costs – Depreciation expense = 4.30 – 1.30 = $3 million
Depreciation tax shield operating cash flow = (Sales – Cash expenses) × (1 – tax rate) + (Depreciation expense × tax rate)
= (7.30 – 3) × (1 – 0.30) + (1.30 × 0.30)
= 3.01 + 0.39
= $3.40 million
The above answers are equal, since all have the same operating cash flows ($3.40 million)
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