Question

Karma Fisker has provided the following information.

Annual sales at their California location = 546 cars

Average selling price = $52,000 per car

Average cost = $46,000 per car

Fixed cost including advertising and labor = $3,000,000 per year

The equipment cost is $2,000,000 and falls under 5 years MACRS. The depreciation rates are

Year	1	2	3	4	5	6
Rate	20%	32%	19.2%	11.52%	11.52%	5.76%

The tax rate is 20%. What is the operating cash flow for Year 2 if you ignore the side effects of the questions.

Answer 1

The operating cash flow is computed as shown below:

= Sales - Average cost - Fixed cost - tax expenses

Tax expense is computed as follows:

= (Sales - Average cost - Fixed cost - depreciation)

= ($ 52,000 x 546 - $ 46,000 x 546 - $ 3,000,000 - $ 2,000,000 x 32%)

= - $ 364,000

Since the profit before taxes is negative, hence there will be no tax expenses. So, the operating cash flow will be as follows:

= $ 52,000 x 546 - $ 46,000 x 546 - $ 3,000,000

= $ 276,000

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