El Dorado Storage has the following projections for Year 1 of a capital budgeting project. Sales...


El Dorado Storage has the following projections for Year 1 of a capital budgeting project.

Sales $239,098

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
Sales 239,098 Yes 239,098
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

Learn more about this topic:

Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4

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