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The financial staff of Carin Communications has identified the following information for the...

Question:

The financial staff of Carin Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales $18 million
Operating costs (not including depreciation) $ 9 million
Depreciation $ 4 million
Interest expense $ 3 million
The company faces a 40% tax rate.

What is the project's operating cash flow for the first year {eq}(t=1) {/eq}?

Operating Cash Flow:

Operating cash flow tracks the amount of cash a firm generates from its usual business operation. Unlike net income that includes both cash and non-cash items, operating cash flow only includes revenue and cost that are cash in nature.

Answer and Explanation:

We can use the following formula to compute operating cash flow (OCF):

  • OCF = (sales - costs - depreciation - interest cost)*(1 - tax rate) + depreciation
  • OCF = (18 - 9 - 4 - 3) *(1 - 40%) + 4
  • OCF = 5.2

That is, the operating cash flow for year 1 is 5.2 million.


Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
10K

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