Question
The owner of a bicycle repair shop forecasts revenues of $240,000 a year. Variable costs will...
|
The owner of a bicycle repair shop forecasts revenues of $240,000 a year. Variable costs will be $70,000, and rental costs for the shop are $50,000 a year. Depreciation on the repair tools will be $30,000. The tax rate is 30%. |
| a. |
Calculate operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. |
| Method | Operating Cash Flow |
| Adjusted accounting profits | $ |
| Cash inflow/cash outflow analysis | |
| Depreciation tax shield approach | |
| b. | Are the above answers equal? |
|
Homework Answers
Answer #1
Answer (a):
Given:
Annual Revenue = $240,000
Annual Variable cost = $70,000
Annual rental cost = $50,000
Annual depreciation = $30,000
Hence:
Annual tax payment = (Revenue - Variable cost - rental cost - depreciation) * Tax rate
= (240000 - 70000 - 50000 - 30000) * 30%
= $27,000
Calculate operating cash flow (OCF) for the year by:
(a) adjusted accounting profits:
OCF = Net profit + Depreciation
= (Revenue - Variable cost - rental cost - depreciation - Tax) + depreciation
= (240000 - 70000 - 50000 - 30000 - 27000) + 30000
= $93,000
(b) cash inflow/cash outflow analysis;
OCF = Cash Inflows - Cash outflows
= 240000 - (70000 + 50000 + 27000) Depreciation is not a cash outflow
= $93,000
(c) the depreciation tax shield approach:
OCF = (Revenue - Cash operating expenses) * (1 - Tax rate) + depreciation tax shield
= (240000 - 70000 - 50000) * (1 - 30%) + 30000 * 30%
= $93,000
Answer (b):
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