The owner of a bicycle repair shop forecasts revenues of $220,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $220,000 a year. Variable costs will be $65,000, and rental costs for the shop are $45,000 a year. Depreciation on the repair tools will be $25,000. The tax rate is 35%.

Calculate operating cash flow for the year by using all three methods: (a) Dollars in minus dollars out; (b) Adjusted accounting profits; and (c) Add back depreciation tax shield.

Method Operating Cash Flow

a.Dollars in minus dollars out

b.Adjusted accounting profits

c.Add back depreciation tax shield

Explanation / Answer

Revenue $220000

Less: Variable cost ($65000)

Less: Rental costs ($45000)

Less: Depreciation ($25000)

Pre tax profit $85000

Less: Tax @ 35% ($29750)

Net income $55250

a) Dollars in minus dollars out = Revenue - Varaible costs - Rental costs - taxes

= $220000 - $65000 - $45000 - $29750

= $80250

b) Adjusted Accounting Profits = Net income + Depreciation

$55250 + $25000

= $80250

c) Add back depreciation tax shield method = (Revenue - Rental cost - Variable cost) * (1 - 0.35) + (Depreciation * 0.35)

= ($220000 - $45000 - $65000) * (1-0.35) + ($25000 * 0.35)

= ($110000) (0.65) + $8750

= $71500 + $8750

= $80250

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