El Dorado Storage has the following projections for Year 1 of a capital budgeting project.
Variable costs $123,179
Fixed costs and selling, general and administrative expenses $12,791
Depreciation Expense $14,628
Tax Rate 35%
Calculate the operating cash flow for Year 1. Round the answer to two decimals.
Operating Cash Flows:
This problem requires an understanding of cash vs. non-cash transactions. A cash transaction is easy to visualize. For example, a cash based sale for a retailer involves a customer making an in-store purchase and paying for the item with cash.
A non-cash transaction is a little different. Depreciation expense on a fixed asset is a good example. Suppose a company purchases a piece of equipment today, which has a useful life of 5 years. That equipment will be depreciated over the next 5 years. The subsequent recognition of the depreciation expense is a non-cash transaction.
Answer and Explanation:
The answer is $72,153.
Solving this problem requires the identification of relevant cash items. However, first we must compute one of them - the federal income tax incurred (and presumably paid) in year 1. An income statement reflective of the tax computation is provided below (columns 1 and 2). The table also includes identification of the relevant cash flows (column 3) and a summation of the operating cash flow for year 1 (column 4).
|Line Item||Amount||Cash Transaction (Y/N)||Cash Flows|
|Less: Variable Costs||(123,179)||Yes||(123,179)|
|Less: Fixed Costs||(12,791)||Yes||(12,791)|
|Less: Depreciation Expense||(14,628)||No||0|
|Equals: Taxable Income||88,500||n/a||n/a|
|Less: Taxes (88,500 * 35%)||(30,975)||Yes||(30,975)|
|Equals: Net Income||57,525||n/a||n/a|
|Total Cash Flow||72,153|
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from Finance 101: Principles of FinanceChapter 10 / Lesson 4