Question

Laurel’s Lawn Care Ltd., has a new mower line that can generate revenues of $126,000 per year. Direct production costs are $42,000, and the fixed costs of maintaining the lawn mower factory are $16,000 a year. The factory originally cost $1.05 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 25%. (Enter your answer in dollars not in millions.)

Answer 1

Laurel's Lawn care Ltd. - Mower line

Depreciation = Original Cost / Number of years of life

= 1050000 / 25

= $42000

Tax = EBIT x 25%

= 26000 x 25%

= $6500

Operating cash flow as calculated below = Net Income + Depreciation - Working Capital Expenses

= 32500 + 42000

= $74500

Head	Amount
Revenues	126000
Less : Direct Costs	-42000
Less: Maintenance costs	-16000
Less: Depreciation	-42000
EBIT	26000
Less :Taxes @ 25%	-6500
Net Income	32500
Add : Depreciation	42000
Operating Cash flows	74500