Chiefland Campers is evaluating a project that will not affect revenues, but it will save the firm $110,000 per year in before-tax operating costs, excluding depreciation. The project's depreciable basis is $840,000, and it will be depreciated on a straight-line basis to a book value equal to zero ($0) over its 10-year life. If the firm's marginal tax rate is 34 percent, what are the annual supplemental operating cash flows?
Operating Cash Flow:
Operating cash flow is the cash generated from the operating activities of the business and is computed using various methods namely the adjusted accounting profits, depreciation tax shield, etc. Under the depreciation tax shield method, the cash expenses and taxes are reduced from the revenues, to which the depreciation tax shield (Depreciation expense * Tax rate) is added.
Answer and Explanation:
The annual supplemental operating cash flows for Chiefland Campers are $101,160.
As per the data:
- Annual cost savings = $110,000
- Depreciation expense per year = $84,000 ($840,000 / 10 years)
- Tax rate = 34%
- Operating cash flow = Annual cost savings * (1 - Tax rate) + Depreciation * Tax rate
- Operating cash flow = $110,000 * (1 - 0.34) + $84,000 * 0.34
- Operating cash flow = $101,160
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from Finance 101: Principles of FinanceChapter 10 / Lesson 4