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A gym owner is considering opening a location on the other side of town. The new...

A gym owner is considering opening a location on the other side of town. The new facility will cost $1.55 million and will be depreciated on a straight-line basis over a 20-year period. The new gym is expected to generate $575,000 in annual sales. Variable costs are 41 percent of sales, the annual fixed costs are $93,700, and the tax rate is 40 percent. What is the operating cash flow? Multiple Choice

A. $224,830

B. $276,550

C. $129,220

D. $319,780

E. $178,330

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Answer #1

Solution: Option = E. $178,330.

Cost of new facility = $1,550,000.

Depreciated value = $1,550,000/ 20 = $77,500

Annual sales = $575,000.

Variable cost = $575,000 41% = $235,750.

Fixed Cost = $93,700

Tax rate = 40%

Operating Cash Flows = (Annual sales - Variable cost - Fixed cost) (1-0.40) + 0.40 Depreciated value.

Operating Cash Flows = ($575,000 - $235,750 - $93,700) 0.60 + 0.40 $77,500.

Operating Cash Flows = $245,550 0.60 + $31,000

Operating Cash Flows = $147,330 + $31,000

Operating Cash Flows = $178,330.

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