Question

Ronnie's Coffee House is considering a project with a life of one year that will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $700. The additional depreciation expense will be $200 and interest expense will increase by $100. An initial cash outlay of $200 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?

A. $2,200

B. $3,500

C. $1,500

D. $2,800

E. $4,200

Answer 1

Solution :

The formula for calculating the Operating cash flow using the top – down approach is

Operating cash flow = Sales – expenses – taxes

As per the information given in the question we have

Sales = $ 6,000 ; Expenses = $ 2,500 ; Taxes = $ 700 ;

Applying the above information in the question we have operating cash flow as

= $ 6,000 - $ 2,500 - $ 7,000

= $ 2,800

The operating cash flow using the top-down approach = $ 2,800

Thus the solution is option D. $ 2,800