Question

Your company has decided to produce a new line of television/electronic media player. You estimate that revenue from sales of this new product will equal $38,250,000. The plant and equipment (new fixed assets) needed to manufacture this product costs $22,400,000 and will be depreciated on a straight-line basis over the seven year project. Additional manufacturing costs to produce the media players would total $16,980,000 each year. The tax rate is 40%. Sketch (explain with a table or in words) a simplified income statement and calculate the firm’s operating cash flow.

Answer 1

Income statement		Formula
Revenue
Sales	38250000
Expenses
Manufacturing costs	16980000
Depreciation	3200000	22400000/7
Total expenses	20180000
Net income	18070000
Tax @ 40%	7228000
Income after tax	10842000

Cash flow statement
Sales	38250000
Manufacturing costs	-16980000
Depreciation	-3200000
Net income	18070000
Tax @ 40%	7228000
Income after tax	10842000
Add back depreciation	3200000
Cash flows from operations	14042000

Depreciation is non cash expense, hence add back in cash flow statement