Question

The owner of a bicycle repair shop forecasts revenues of $236,000 a year. Variable costs will be $69,000, and rental costs for the shop are $49,000 a year. Depreciation on the repair tools will be $29,000. The tax rate is 40%. 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.

Answer 1

Income Statement
Revenue		236000
Rental costs	49000
Variable costs	69000
Depreciation	29000	147000
Pretax profit		89000
Taxes (40%)		35600
Net income		53400

(a) Dollars in minus dollars out

operating cash flow =Revenue – rental costs – variable costs – taxes

operating cash flow=$236000-$49000-$69000-$35600

operating cash flow=$82400

(b) . Adjusted accounting profits

=Net income + depreciation

operating cash flow=53400+29000

=$82400

(c)

Add back depreciation tax shield.

[(Revenue – rental costs – variable costs) *(1 – 0.40)] + (depreciation *0.40)

(236000-$49000-$69000)*(1-.40)+(29000*.40)

operating cash flow=$82400