A proposed new project has projected sales of $210,000, costs of $94,500, and depreciation of $25,700. The tax rate is 25 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.)

A proposed new project has projected sales of $210,000, costs of $94,500, and depreciation of $25,700. The tax rate is 25 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.)


Explanation

To calculate the OCF, we first need to calculate net income. The income statement is:

Sales	$	210,000
Costs		94,500
Depreciation		25,700
EBT	$	89,800
Taxes (25%)		22,450
Net income	$	67,350

Using the most common financial calculation for OCF, we get:

OCF = EBIT + Depreciation − Taxes

OCF = $89,800 + 25,700 − 22,450

OCF = $93,050

  

The top-down approach to calculating OCF yields:

OCF = Sales − Costs − Taxes

OCF = $210,000 − 94,500 − 22,450

OCF = $93,050

The tax-shield approach is:

OCF = (Sales − Costs)(1 − TC) + TC(Depreciation)

OCF = ($210,000 − 94,500)(1 − .25) + .25($25,700)

OCF = $93,050

And the bottom-up approach is:

OCF = Net income + Depreciation

OCF = $67,350 + 25,700

OCF = $93,050

All four methods of calculating OCF should always give the same answer.

Thanks